Key Points Diverging approaches of competition authorities in Europe for the most favoured-customer (MFC) clauses have created uncertainty for the development of novel business models. The Turkish Competition Authority’s (TCA) decision for the online food-ordering market has contributed to the diverging approaches of the competition authorities for the evaluation of MFC clauses. In light of this uncertainty, legal advice in such a legal environment may be highly conservative towards new business models. I. Introduction While new business models in the online world emerge at an unprecedented pace, interpretation of legal rules has lagged behind those innovations. In particular, interpretation of competition rules may be far from being a guide for the lawfulness of novel business models. On one hand, such an inadequacy leads to legal and business uncertainty, on the other hand it restricts the attorneys counselling clients contemplating the adoption of novel business models in the online world. The diverging approaches of competition authorities all around the world for most favoured-customer (MFC) clauses have been a recent example of this phenomenon. Most of the competition proceedings concerning the MFC clauses in different countries closed with the commitments given by the investigated firms. Investigations concerning online travelling agencies in Italy, Sweden, France, and United Kingdom ended with commitments that abolish some types of MFC clauses. However, for a similar investigation, the German competition authority (Bundeskartellamt) has banned all types of MFC clauses with an infringement decision. Nevertheless, Bundeskartellamt approved the commitments of the investigated party and did not impose any fine.1 MFC issues are not only restricted with online travel agencies, e-book sellers, and publishers have also been investigated on both sides of the Atlantic. In the United States, Apple and e-book publishers were investigated concerning the MFC clauses. While the court found that MFC is lawful, it concluded that Apple had facilitated a conspiracy for price fixing of the publishers through MFC clauses. In Europe, investigations for Amazon.com have taken place at both the Commission level and the national level, Germany. Recently both the Commission and Bundeskartellamt ended the investigations with the commitments about the MFC clauses.2 In the meantime, an investigation started by the Turkish Competition Authority (TCA) concerning the MFC practices of Yemeksepeti.com, an online food-ordering platform, concluded with an infringement decision.3 Although the commitment of Yemeksepeti.com was welcomed by TCA, the decision also imposed a fine to the company. In that sense, TCA’s Yemeksepeti.com decision has contributed to the diverging approaches of the competition authorities for the evaluation of MFC practices. TCA has also reinforced its view by its recent Booking.com infringement decision.4 This paper broadly aims to emphasise the legal and business uncertainty created by diverging approaches for MFC clauses. Since most of the investigations concerning the MFC clauses terminated with commitments, we have not had many opportunities to learn much about the analysis of the authorities. Moreover, disparity in the evaluation of MFC practices in infringement decisions has also increased these uncertainties. Therefore, the paper examines Yemeksepeti.com decision in order to exhibit the problematic considerations of the TCA for MFC practices. The following section introduces the background of the case to better inform the reader about the MFC practices of Yemeksepeti.com. The third section discusses the problematic consideration of the TCA concerning the link between market definition and MFC practices. The fourth section discusses issues related with the evaluation of abuse of dominance and misidentification of network effects and MFC practices. The fifth section discusses the possible explanation of imposing monetary fine despite the commitments. The final section provides the concluding remarks. II. Background of the case In March 2015, TCA started an investigation of Yemeksepeti.com for certain of its conducts and for the MFC clauses in its agreements with restaurants. Yemeksepeti.com is the largest food-ordering platform in Turkey, and it also has operations in nearby countries. The company’s business model is based on gathering consumers and restaurants on its platform. It exhibits current menus of member restaurants to consumers who are also subscribers to the platform. The platform only charges the restaurants for each order given on its platform and doesn’t apply any charge to the consumers. In that sense, the company applied a commission model rather than an agency model. The genuine business model of the platform is based on offering the same conditions (including price) to the consumers that are offered by the member restaurants for their delivery services. This is an MFC clause referred to as a 'narrow MFC'. Later, the TCA claimed that the platform has extended this beyond the restaurants’ own delivery services by including rival platforms. This clause is referred to as a 'wide MFC'. TCA had started the investigation with respect to Articles 4 and 6 of the Competition Act, which may be considered as the equivalents of Article 101 and 102 of the Treaty on the Functioning of the European Union (TFEU); respectively. However, later on TCA dropped all the allegations concerning the conducts of the platform, except the abuse of dominance through wide MFC practices. The authority claimed that the wide MFC practices of the platform has exclusionary effects in the market. Although the allegation is partially in accord with the European Commission and other European national competition authorities’ theories of harm for the MFC cases, it is worth noting that investigations in EU mostly refer to softening competition between platforms and increasing commission rates or prices. In its decision, TCA banned the wide MFC practices that oblige the member restaurants to offer the same conditions (including price) which they offer on the rival platforms. Moreover, TCA also imposed a fine to the platform, because of its abuse of dominant position through its conduct via the wide MFC practices. From the reasoned decision, we have seen that the platform had also provided commitments to discipline its MFC practices through adopting a procedure. Although TCA had welcomed those commitments, it did not refrain from imposing a monetary fine, unlike the counter parts in other jurisdictions. In fact, the decision of Yemeksepeti.com can be criticised on several grounds, however this paper focuses on the issues related with MFC practices. III. Missing link between the market definition and the MFC practices Definition of the relevant market seems to be one of the problematic parts in the decision. It is problematic not because of being wrong, but it is problematic not to give any guidance for a solid understanding. In the decision, the relevant product market is defined as 'online food-ordering service platforms'. However, no specific analysis was done to define the relevant market from the perspective of a two-sided market. For instance, neither was a survey conducted specifically for the investigation (by the investigated party), nor was the analysis of TCA based on a survey which may have had a potential to exhibit the real competitive pressure between the probable substitutes. Yet, in its HRS infringement decision, the Bundeskartellamt took into account the survey offered by the investigated party and independent surveys for the industry.5 Moreover, in the TCA decision no solid framework, such as the hypothetical monopolist (Small but Significant and Non-Transitory Increase in Price, SSNIP) test had been used as a conceptual framework while interpreting the choice of the relevant market. In the decision, the differences between the online platforms and restaurants’ own web sites and phone order services are evaluated. From the perspective of the consumers, it was argued that online platforms provide more convenience than the restaurants’ own web sites or phone order services. It was argued that, mostly because of those differences, platform services and restaurant’s own order channels are not substitutable. On the other hand, from the restaurants’ perspective, the main difference was emphasised as the network effects6 which might only be created by a platform, not restaurants’ own order channels. Basically, based on those two considerations, TCA defined the market by isolating the restaurants’ own channels. However, there are two criticisms that should be raised for this relevant market definition. First, if the restaurants’ own channels are not substitutable, what is the purpose of the narrow MFC clause in the agreements between the restaurants and the platform? If the role of such a clause is to eliminate the substitution between the restaurants’ own channels and the platform, why was it not mentioned/examined in the decision? Second, if TCA somehow considers the online platforms elsewhere, it was still expected to discuss the possible substitution in a comprehensive manner. For instance, a hypothetical monopolist test (SSNIP) test – at least at the conceptual level – would offset the missing analysis and would shed light on real dynamics in the market. The first issue is in fact paradoxically inconsistent with the existence reason of the narrow MFC clauses in the agreements between the restaurants and the platform. The main motivation of the platform to exercise the narrow MFC clause is to protect its investments against the free-riding behaviour of the restaurants.7 The platform urges such a clause to avoid any divergence sourced from price/condition differences between the restaurants’ own channels and the platform. This sounds like almost a perfect substitution between the restaurants’ own channels; and it was expected to be examined in the decision. Accordingly, TCA has not made any comprehensive analysis to examine the substitution between the other channels and the online platform services. For instance, discussion on the SSNIP test would shed light on the availability of such a substitution. As Evans and Noel8 and Emch and Thompson9 mentioned, even for the multisided markets, defining the relevant market in a comprehensive manner is essential to analyse the competitive constraints. As the authors suggest, an SSNIP test should be applied to do it in a solid framework. However, as mentioned by Filistrucchi et al.10 in two-sided markets, the SSNIP test cannot be applied in its traditional form. According to the authors, in two-sided markets, authorities should employ a modified version of the SSNIP test that fits the nature of the two-sided market. The authors suggest that in a two-sided transaction market – like the online food ordering – one should check the profitability of an increase in the price level. In doing so, the candidate products, other than the platforms, may appear as substitutes. For instance, in their assessment for the card payment platforms, the authors suggest that the candidate products should be non-intermediated transactions, such as a direct rental or a cash payment.11 If TCA had discussed the substitutability issues around a hypothetical monopolist test – at least at the conceptual level – it is not sure if it might arrive at a different conclusion. However, we would get an understanding that the authority considers the substitutability between the alternatives around a solid framework. Since the MFC practices are strictly related with substitutability, this seems a missing link that had to be established by TCA. IV. Network effects or MFC practices: which is exclusionary? Although TCA started the investigation with respect to Article 4 and 6, later in the published decision, we learned that TCA has investigated the conducts of Yemeksepeti.com with respect to abuse of a dominant position (Article 6, corresponding to the article 102 of TFEU). The main allegation of TCA in this framework was the exclusionary conduct of the platform which is based on its wide MFC practices. Since TCA had defined the relevant market as online food-ordering service platform, the platform’s market share appeared as more than 80 percent12 in most of the cities of Turkey. Based on this high market share, and arguing that the network effects in the market (without making any distinction, if its direct or indirect), TCA concluded that the platform is a dominant undertaking in the relevant market. However, it is not explained clearly how the wide MFC practices exclude rival platforms. In the decision, TCA claimed that the application of wide MFC practices has exclusionary effects in the market through restricting the price and product diversification. The only evidence shown by TCA which supports this claim was the failure of rival platforms to penetrate the market. However, TCA had not examined whether those rival platforms apply proper strategies for a two-sided market. In that sense, TCA eventually indicates an outcome rather than a process. To support its argument, TCA condemned the application of wide MFC practices which avoids the rival platforms to attract famous fast-food restaurant chains. However, it is not discussed how the wide MFC practices prevent attracting those fast-food chains. It seems that TCA has failed to identify the outcomes of wide MFC and network effects through the process; and it quickly came to the conclusion. However, in the decision it mentioned that it would adopt an effect based (rule of reason) approach for the evaluation of MFC practices. The interaction between the wide MFC practices and network effects should be analysed in order to identify the exclusionary effects properly. In fact, there are two issues that have a potential to shed a light on such an interaction: critical mass and switching cost. In order to sustain its operation, a platform has to reach a critical mass on both sides of the market. That is the only way that it may benefit indirect network externalities between the two types of customers on each side of the market. However, this indicates a 'chicken- and-egg problem' to provide efforts on 'get both sides on board'.13 In the online food-ordering market, it indicates enough numbers of consumers and restaurants to create indirect network effects. A further step that should be analysed is the existence of any switching cost that would exclude some members from being members of an entrant platform. In the absence of contractual or economical costs and/or exclusive contracts, members from each side can be multihomed.14 However, even with the existence of switching costs, entrant platforms must apply certain business strategies to make profit in the market.15 To enjoy the benefit of indirect network effects quickly, new entrants sacrifice their short-term profits for their long-term profits by applying penetration pricing strategies.16 Those strategies consist of providing advantages for the customers at one or both sides of the market. In such a platform competition, charging lower or zero commission for the restaurants and/or subsidising consumers are the typical strategies that can be applied for the penetration. At that point, the question appears regarding how the wide MFC practices block such practices. Applying lower commission charges attracts restaurants on one side, and providing benefits to the consumers increased their numbers. Do the wide MFC practices prevent rival platforms from applying those strategies? It seems that TCA only concentrates on the prices applied at the consumer side. However, there are plenty of penetration strategies other than price.17 For instance, by applying lower commission rates entrants may attract restaurants to their platforms and, on the other hand, by applying direct subsidies to the consumers may 'get both sides on board'.18 Although wide MFC in practice avoids the appearance of different prices on rival platforms, plenty of business strategies might exhibit success in the market. In fact, if TCA adopted an effect based (rule of reason) approach, at least some of the existing penetrating strategies of rival platforms had to be analysed instead of such a categorical evaluation. In fact, such an analysis might partially eliminate uncertainty about TCA’s approach for novel business models in the online world. V. Imposing fine despite the commitments As we mentioned in the introduction section, many of the relevant decisions in European countries are commitment decisions. Only the decision of Bundeskartellamt indicates an infringement, but no fine was imposed. TCA’s Yemeksepeti.com decision has also created a divergence in that sense. Although the commitments of the company concerning the disciplining of its MFC practices were welcomed, a fine was imposed. In fact, TCA has a tradition and a proper legislation to accept commitments, preferably structural commitments, for mergers and acquisitions transactions.19 However, for the infringement investigations, TCA has no such a tradition or legislation. However, Article 9/3 of the Competition Act states that TCA may inform the undertaking concerning how to terminate the infringement. For instance, TCA took decisions based on the article 9/3 for the investigations concerning electricity distribution/retail companies during the liberalisation and restructuring process of the electricity industry.20 Although TCA has given several decisions based on Article 9/3 in the sequel of pre-investigation process, there seems to be no legal impediment to give such a decision in the sequel of pre-investigation process. Accepting the commitments which discipline the wide MFC practices and imposing no fine might create a decision that would be aligned with the approaches of most of the European authorities, including the Commission. Furthermore, such a decision could partially eliminate the legal and business uncertainty for novel business models in the online world. In particular, MFC practices in the online world have been a recent issue on which there has not been a settlement yet for their effects on competition and welfare. Most of the online start-up companies come on to the market with novel business models and quickly become 'dominant' in the markets which they create. However, expecting those entrepreneurs to evaluate the lawfulness of their sophisticated business models – such as MFC – seems inequitable. Instead of imposing fines which may have a potential to create long-term social opportunity cost through curbing incentives, corrective measures may play a productive role. VI. Concluding remarks This paper evaluates the diverging approaches for MFC practices considering the TCA’s Yemeksepeti.com decision. In respect to three aspects, the paper criticises the decision which diverges from the European authorities’ relevant decisions. First, the definition of relevant product market in the decision was not linked to the MFC practices, which primarily aim to eliminate the substitutability between the transaction in different medium. Second, in its decision TCA has not empirically put the source of exclusionary effects. In other words, although TCA ruled that the platform’s conduct based on wide MFC practices has exclusionary effects, it fails to distinguish the sources of exclusionary effects whether from MFC practices or network effects. Third, unlike the relevant decisions by the European authorities’, TCA did impose a monetary fine despite the commitments that disciplines the MFC practices. The only settlement for the MFC practices between the competition authorities or scholars is the necessity of adopting an effect base (rule of reason) approach while investigating the cases. Although TCA mentioned it to be a part of this settlement, it has not adopted a proper effect base (rule of reason) approach. Especially in its analysis for the abuse of dominance, it indicates almost a categorical infringement concerning the wide MFC practices. However, such a treatment has two effects on the creation of novel business models. First it may constitute a business uncertainty for the development of new business model and value creation. Second, legal advice in such a legal environment may be highly conservative towards new business models. Footnotes 1 See Margherita Colangelo, ‘Parity Clauses and Competition Law in Digital Marketplaces: The Case of Online Hotel Booking’ (2016) 8 Journal of European Competition Law & Practice 3; Margherita Colangelo and Vincenzo Zeno-Zencovich, ‘Online Platforms, Competition Rules and Consumer Protection in Travel Industry’ (2016) 5 Journal of European Consumer and Market Law 75; Silke Heinz, ‘Online Booking Platforms and EU Competition Law in the Wake of the German Bundeskartellamt’s Booking.com Infringement Decision’ (2016) 7 Journal of European Competition Law & Practice 530. 2 Pınar Akman, ‘A Competition Law Assessment of Platform Most-Favoured-Customer Clauses’  Journal of Competition Law and Economics 1. 3 TCA, Board Decision, numbered 16-20/347-156, dated 09.06.2016 http://www.rekabet.gov.tr/File/?path=ROOT%2F1%2FDocuments%2FGerekçeli+Kurul+Kararı%2F16-20-347-156.pdf accessed March 12, 2017. 4 TCA, Board Decision, numbered 17-01/12-04, dated 05.01.2017 http://www.rekabet.gov.tr/Karar?kararId=d2bfb2c8-e517-498a-9542-07e3cad8a419 accessed June 17, 2017. 5 Published decision of the Federal Cartel Office: HRS – Best price clauses 30.05.2014 http://www.bundeskartellamt.de/SharedDocs/Entscheidung/EN/Entscheidungen/Kartellverbot/B9-66-10.html?nn=3591568 accessed June 15, 2017. 6 It was not mentioned whether it was direct or indirect network effect. 7 Ariel Ezrachi, ‘The Competitive Effects of Parity Clauses on Online Commerce’ (2015) 11 European Competition Journal 488. 8 David S Evans and Michael Noel, ‘Defining Antitrust Markets When Firms Operate Two-Sided Platforms’ (2005) 2 Columbia Business Law Review 102. 9 Eric Emch and T Scott Thompson, ‘Market Definition and Market Power in Payment Card Networks’ (2006) 5 Review of Network Economics 45. 10 Lapo Filistrucchi and others, ‘Market Definition in Two-Sided Markets: Theory and Practice’ (2014) 10 Journal of Competition Law and Economics 293. 11 ibid. 12 Author’s estimation. In the reasoned decision, the market shares are hidden. 13 Jean-charles Rochet and Jean Tirole, ‘Platform Competition in Two-Sided Markets’ (2003) 1 Journal of the European Economic Association 990. 14 Mark Armstrong and Julian Wright, ‘Two-Sided Markets, Competitive Bottlenecks and Exclusive Contracts’ (2007) 32 Economic Theory 353. 15 Bernard Caillaud and Bruno Jullien, ‘Chicken & Egg: Competition among Intermediation Service Providers’ (2003) 34 The RAND Journal of Economics 309. 16 See Thomas Eisenmann, Geoffrey Parker and Marshall W Van Alstyne, ‘Strategies for Two- Sided Markets’ (2006) 84 Harvard Business Review 12; Joseph Farrell and Paul Klemperer, ‘Chapter 31 Coordination and Lock-In: Competition with Switching Costs and Network Effects’, Handbook of Industrial Organization, vol 3 (2007); Michael L Katz and Carl Shapiro, ‘Systems Competition and Network Effects’ (1994) 8 Journal of Economic Perspectives 93. 17 Eisenmann, Parker and Alstyne. 18 Rochet and Tirole. 19 In its decision concerning the acquisition of Dosu Maya by Lesaffre, TCA even accepted behavioural remedies like committed price caps (TCA Board Decision, numbered 14-52/903-411, dated 15.12.2014 http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fGerekçeli+Kurul+Kararı%2f14-52-903-411.pdf accessed March 12, 2017). 20 See TCA Board Decision, numbered 15-03/33-18, dated 15.01.2015 http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fGerekçeli+Kurul+Kararı%2f15-03-33-18.pdf accessed March 12, 2017. © The Author 2018. 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Journal of European Competition Law & Practice – Oxford University Press
Published: Feb 1, 2018
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