Below, we have provided the full transcript of our panel discussion “Unfair Competition” and “Uneven Bargaining Positions”: Role in Competition Assessment. Read below to see the timely discussion where a panel of experts deepened the discussion regarding this topic, and how it specifically relates to South Korea.
Today’s program centers around the role of competitional assessments in the area of unfair competition and uneven bargaining positions. I’m very excited to be moderating and exploring this issue with this distinguished panel of experts. My name is a Youngin Jung, I’m a Senior Partner and the Co-Chair of Kim & Shang’s antitrust and competition practice. Today I’m extremely honored to be introducing our esteemed panelists for this session.
Professor Carmelo Cennamo from the Copenhagen Business School. Professor Cennamo’s role also includes serving as the Director of Entrepreneurship Concentrational studies and Director of the Digital Market Competition Forum. Professor Cennamo’s work has focused on in depth study of competition in digital markets, digital platforms, and digital ecosystems.
Andy Chen is the Vice-Chairperson at Taiwan Free Trade Commission. Vice-Chairman Chen has had an extremely distinctive career at the TFTC, including past experience serving as commissioner from 2007 to 2010, and leading TFTCs delegation to the OECD competition committee. He was nominated and confirmed to serve as the vice-chairperson last year in December 2020.
And last, but not least, joining our panel is Dr. Elizabeth Wang, who is an Executive Vice President at Compass Lexecon, where she specializes in antitrust issues in the regulatory and litigation settings. Elizabeth has a wealth of experience across industries including healthcare and high-tech. Over her esteemed career, she has had extensive experience working on antitrust matters with Asian regulators.
Before I turn to our panelists, I would like to share some observations on the topic. The idea of fairness has a recently reentered the policy discourse underpinning competition law enforcement in Asia and Europe and beyond. Still, the boundary of fairness as a driver of competition enforcement is unclear, and for some, dangerously flexible. According to George Stigler, fairness is a suitcase full of bottled ethics for which one freely chooses to blend his own type of justice.
Over the years, the application of competition rules has been focusing on restrictions to the competition process with the effect of harming consumers, where recently some cases abroad or decided in some Asian countries, and EU, appear to be inspired by wide and somewhat elusive fairness considerations, including protecting weaker parties in the transaction, discrimination, equality opportunities. Some argue that if fairness were actually employed in a substantive decision making as a goal and criteria, that will lead to unequal and efficient results. This paradox is a result by engaging in objective and rigorous analysis, applying established concept of competition law and economics, which is first consumer welfare and efficient allocation of resources as the key goals of competition law.
Secondly, competition on the merits and the effect on competition as the core criteria for a finding of infringement. A good example of unfair competition law that has been frequently used by some agencies, is the abuse of economic independence, also known as abuse of a superior bargaining position. This is a legal concept that addresses a situation where one party to a transaction that is in a position with respect to another, abuses such a position. In contrast to abusive conduct by dominant companies, the superior bargaining position does not require a dominant position in any market. Instead, it requires some sort of a superior position over a counterparty of a transaction. It aims to protect the weaker party from the abuse of such position by the party in the superior position. This becomes particularly relevant in situations where abusive practice may have taken place, but by a party that does not hold a dominant position in the market. A typical setting where this might occur is where a larger scale retailer with buying power takes advantage over its stronger bargaining position vis-a-vis its smaller suppliers and imposes unfavorable conditions on them. In order to address a such situations, some jurisdictions have established separate rules from abusive dominance position. Recently, a trend is developing where these type of provisions is newly introduced, or existing legal provisions are reinterpreted, in order to address growing concerns in digital markets. Often, in the digital market is a difficult to prove dominance, including because of the speed of technological evolution and the market innovation, which often means that regulators responded very hard to grasp what the exact boundaries of the market might be.
A number of leading jurisdictions in Asia, including Japan, Korea, and Taiwan, have competition law provisions that provide for abuse of superior bargaining position. In Japan, for instance, the Anti-monopoly Act prohibits abusers of superior bargaining position, referring to a situation in which a party makes use of its superior bargaining position relative to another party to take a certain act unjustly in light of normal business practices.
In Korea, similarly, the Monopoly Regulation and Fair Trade Act defines abuse of superior bargaining position as an enterprise’s act of unfairly taking advantage of the positioning trade when trading with others.
In Taiwan, the abuse of the superior bargaining provision will likely violate the general competition provisions, or the unpenetrated provisions of Taiwan Fair Trade Act.
This session is focused on whether fairness may guide competition enforcement. What is the significance, maybe in explaining recent trends in actual outcomes and what implication can be observed or expected by relying on famous standard in the design of substantive principles? Let me turn to the panelists.
My first question is for Elizabeth. Elizabeth, unfairness in competition law is an elusive concept. Does a fairness have a role to play in a competition law enforcement? And also, is there an analytical framework for us to consider fairness in competition law assessment?
Youngjin, thank you for inviting me to this very important panel, and your question is absolutely critical in my mind.
To recap the questions, how to enforce the unfair competition law and how does abuse of superior bargaining power fit into such framework? Let me start by saying that I’m an economist, so I can only offer my opinion from an economic perspective.
As you said earlier on, Youngjin, that unfairness is not a pure economic concept to begin with. However, competition law, in general has a very clear set of economic goals, which is to improve consumer welfare through protecting the competition process. Even though unfair competition does not have, is not a pure economic concept, in many times it may have historical contact rooted from other concepts such as social justice, such as honesty or public morale. For example, I understand in one of the historical contexts, you mentioned in Japan, Korea, and Taiwan, maybe anti-competition law is to help protect small and medium enterprises.
But let me take one step back and say there are two economic interpretations about what unfairness would likely to be, and see if that may help understand what is the right way to thinking about unfairness. From an economic perspective, there is ex-ante unfairness versus ex-post unfairness. What that means is that ex-ante refers to fairness judged by the opportunity to compete, rather than the outcome of the competition process.
So, for example, price discrimination is many times only judged by the outcome. After the competition process, different people pay different prices. So, from the outcome perspective, prices are different. In a sense it’s unfair. However, there are extensive economic literature showing that price discrimination can be beneficial in term of improved consumer welfare. So ex-ante unfairness may not lead to the same decision as ex-post unfairness. And from improving consumer welfare point of view, maybe ex-ante unfairness is more aligned with that goal.
Let me go back to the point that competition assessment, in today’s topic, there is a tension between unfair and competition. Before we define unfairness, it’s difficult to determine how does competition analysis fit in. Because competition analysis has a very clear goal, which is to protect the competition process. As for “unfair”, we need to first develop what that means, and then we can fit the two things together. Back to you, Youngjin.
Thank you, Elizabeth. those are very important observations about how unfairness and competition come into play.
Let me turn to Carmelo. In the digital market space, how do you think about the benefit that tech companies bring to the broader sector, such as innovation, introduction of more intuitive and efficient services?
First of all, thank you very much for having me join in this important discussion.
So, onto the question; I think that perhaps that also links to the questions of unfairness that we need to start from the point where what do these new digital platforms and settings. I’m referring particularly to the extended collective enterprise that they facilitate around these technologies, which we usually, in management research, refer to with the term ecosystem, what do they bring to the market and that to the broader sectors as a set terms of a revolutionary management perspective. They actually bring a better organizational setting or more organizing that addresses the typical externalities problems that lead to market failures. That’s where they are so superior to the current organizing modalities that we have, which basically are markets on one hand, which are totally decentralized, and firms on the other hand that are totally centralized, and then we have some broad architectures in the middle; joint ventures, extend the supply chains, and you name it.
Now, what kind of benefits do they bring to the market? Essentially, they address, in a more efficient way information problems. Let me hit on this. The very first is about information asymmetry. By linking, and this is basically the concept of where we usually get referred to, as you know, these platforms that are matchmakers, and we refer to them as being marketplaces. They link together and directly to end users on one end. The downstream actors, so customers to the upstream, those that are producing goods or services. By linking them directly, what they essentially do for their technologies, they devise tools and rules, also, not just the digital architecture, but also the governance rules that they put in place to put the incentive systems in a way such that some of those externalities gets internalized by the structure that they create. We have these reviews and things like that where the customers themselves can actually evaluate the quality or not, and how much they like some products or not. Those are all augmented market signals beyond the price mechanism that we know as one of the ways of internalizing these externalities. Essentially, they put in place a mechanism to internalize these externalities. But that’s not just with information asymmetry that avoids basically for markets emergents to emerge, but that’s just one issue.
The other issue where we see that they’re now very powerful engines of innovation, it actually has to do with information complexity problems, and also with information discovery, so exploring new opportunities and new options for value consumptions that users might not be aware of. And when we come, for instance, to complexity, there are lots of mis-cooperations and collaborations between firms precisely because they need to come together in the first place to create something. And if there isn’t anyone there to decouple some of the pieces of the information complexity that is there, and then gives that meaning. Shaping directions for where the innovation, the technology should go. Many of these inter-firm relationships won’t be steered in a way that produces the kind of cost specialization between firms that’s a necessary to produce integrated system innovation.
We have separated from the maintained modules that will never be tailored to each other to produce the kind of system of products that then can be used easily by customers. That’s where some of the platforms produce lots of value, by steering this and giving directions to the firms that connect so that they actually trace a path for where innovation should happen and how it should come together, and that basically makes all the job on the production side easier for firms to follow, because there is a play script. And on the other side, it becomes a readily valuable for consumers on a plug and play modality to be used. And that is basically a way to free up value in the system where otherwise will likely not happen precisely because we don’t have a central orchestrator that takes into account all of these externalities and coordinates this.
Essentially, we see that what they’re bringing here are instances of collective organizing where they are totally different from the kind of organization that we have been familiar with in the traditional hierarchies versus the decentralized system that are at the market. They are neither hierarchies nor markets, but they actually combine elements of the two to steer basically value productions and lock up in opportunities for innovation. That’s where the power is in terms of the positive effects, addressing these externalities. That’s also where the issues and, I guess, we will discuss more of them, come into place because, of course, they become essentially architects of value, and in this, basically they have a big say where the value goes, both in terms of creation, but more essentially in terms of who captures most of this value.
Thank you very much, Carmelo. Your perspectives on the benefits that tech companies could bring to the broader sector, is something that we should be reminded of in discussing, how best to regulate the digital market in the future.
Andy, a growing number of agencies are interested in unfair competition law, in regulating duty to duty economy. In general, restrictions such as Japan, Korea, Taiwan, have, in their own enforcement arsenal, specific status for abuse of uneven bargaining position or a superior bargaining position. How do you assess these trends? Is there any purpose for deviating from the traditional enforcement tools? Such as, for example, market dominance which has been developed over the many, many years in the competition law universe.
Thank you, Youngjin. Thanks for the floor.
Let me start by saying that I’m speaking in my own capacity, and what I’m going to say is in no way representing the view and the position of the Taiwan Fair Trade Commission.
As you mentioned, the superior bargaining position theory has been regularly applied in Taiwan, but not only limited to unfair cases. In the past, we have applied this theory to, for example, the first one is to kind of soften the rigidity of using market share as the starting point to initiate an investigation.
For example, in 2016, the Taiwan Fair Trade Commission made a decision that they set that the market share threshold for initiating investigation in vertical cases, especially abuse cases at a market share of 15% at least, but only with one exception: when the parties have the superior bargaining position, then, that threshold didn’t apply. It’s is an exception. And secondly, the superior bargain position theory also has been applied in the past to franchise agreement. The franchise agreement, the franchisor in the franchise agreement has been viewed in the past as enjoying their superior bargain position over the franchisee, especially once they’ve signed the franchise contract. Because the franchisor will be able to control the business management, or even the appointment of personnel. There will be a review as kind of the de facto merger. A party to a franchise agreement needs to file the pre-merger notification, and the TFTC will review the case, review the contract as a merger case. That’s in the past, but the underlying theory is the superior bargaining position.
And, of course, the theory has been applied mostly to unfair cases, and as Youngjin has mentioned, that we have a general provision. It is article 25 of the Taiwan Fair Trade Act. Under that article, we also have a guideline and specify the factors that will be considered when the TFTC tries to apply the superior bargaining positions theory. The two most frequently applied cases are to lock-in cases. So, for example, in the contract related to the durable goods, so for example, elevator. We have cases that are based on the superior bargaining position that we have fined the elevator supplier for changing the contractual terms after the contract, the purchase contract’s been signed without notifying, the contractual counterparts, so this is the first type of lock-in theory.
The second type is especially for the large distributor, the wholesaler and his contractor relationship vis-a-vis the upstream supplier. Because usually all these larger distributors such as Costco or the mega store, they can determine the purchase term from, especially in a purchase contract with the upstream supplier. There are cases that dealt with, again, the larger distributor unilaterally changing the original contract terms and try to impose additional contractual obligations on the upstream supplier, and that also has been deemed as unfair.
Again, the underlying theory is what we call the superior bargaining position. If we summarize all those past experiences and the cases, you can easily find that the superior bargaining position has applied to the cases that dealt with, actually, post-contractual conduct and is not a pre-contractual arrangement. Based on that observation, I think there are a couple of pitfalls, as Youngjin has mentioned the use the term pitfall in applying the superior bargaining position.
The first one is, I think Elizabeth also mentioned a little bit about that, is the ex-ante versus ex-post. The problem of making a comparison between ex-ante or ex-post. And in the cases in Taiwan, basically most of the cases, the TFTC focuses on ex-post relationship. It means that once that the contract has been signed, both parties will be locked into a specific contractual relationship. But as we all know, a contract has a valid binding force, right? Otherwise, it won’t be called a contract. So, each time a contract was signed, actually creates some kind of binding force that will force one of the party difficult or harder to change or deviate from the existing economical relationship. It means that both parties will rely, will depend on the other party for future transactions.
If you want to apply the theory and you base your observation on the ex-post contract, the post-contractual conducts, actually, it cannot truly reflect the market power or truly the competition situation in the markets. And what is more, probably what could be more reflective of the real market competition, is the ex-ante business opportunity. So instead of asking the question, whether when both parties enter a contract, they will be locked in or be bound by the contractual terms, and therefore one party will enjoy a superior bargaining position, we probably might, should ask whether, pre-contractually, the party has the opportunity not to deal with the party who enjoyed a superior bargaining position after the contract is signed.
I think that’s the point that we probably we can discuss more, especially when we discuss this superior bargaining theory. And the second question or pitfall I want to raise for further discussion is that if we’re really concerned about market power, if we’re really concerned about the asymmetrical bargaining position, maybe we could ask first, is that really true that the traditional definition of market power cannot be applied to analyze these kinds of cases.
Does a traditional SSNIP approach has any limits in dealing with these unequal or asymmetrical bargaining positions? At least from my personal perspective, I think the SSNIP is based on what economists like to say, the substitutability between different products. We try to observe whether a hypothetical increase, price increase by 5%, how many consumers or how many people or how many buyers will switch to another supplier. Then we can determine whether the market has been defined too narrowly or too broadly. If the superior bargaining position means that dependence, means that one of the parties to the contract, will rely on the other party to complete or to facilitate a future transaction, that kind of dependence could also be revealed by the SSNIP.
For example, if I raise the price by 5%, and for me, if I rely on the other party heavily, I cannot switch, I cannot deviate from the existing contractual party, then what you will observe is that I stay within the existing contractual relationship. And by doing that, we probably will narrow the relevant market and make the party who enjoyed a superior bargaining position have more market power under the traditional sense. So we could still bring this kind of unequal bargaining position within the traditional framework of antitrust analysis. So that’s the question, or that’s the, I think, the theoretical issue I think that I would like to raise for our further discussion. And if SSNIP could deal with this kind of issue, then probably it may not be necessary that we need to rely on the superior bargaining position, especially which I am going to talk about a little bit later, which I think is quite unpredictable in terms of application of law. So get back to you, Youngjin.
Thank you so much for your observations about the abuse of superior bargaining position and how that particular body of law is enforced in some of the Asian jurisdictions. I’m particularly interested in your views about the attempt to put the abusive of superior bargaining position under the existing, established a framework. And, for instance, the issue of economic dependence. What we call unavoidable trading partner. When you are locked in so you cannot escape from it, then from a traditional, analytical framework, that might have to do with how broadly or how narrowly they define the market. I think that’s a very interesting observation, and maybe we can find more time to discuss that element of the law.
Let me shift the gears a little bit, and thinking about policy implications, my next question is to Carmelo: should regulations expand beyond the companies that are dominant in the antitrust, the sense? In terms of the policy implications on the digital economy. Carmelo?
Thank you for the question. I think that this relates to some of the points that have been raised by Andy, and particularly on the uncertainty. I mean on applying the existing frameworks that highly depend on the definition of the market, so the main where competition happens. I think this is problematic in the digital space because the unique and distinctive aspect of digital is that we don’t have any more companies competing within markets, within defined markets. We have companies competing across markets. So that’s the revolution of digital, so we’re going for, we’re shifting increasingly from economies of scale on the supply side, to economies of scope on the customer side.
Therefore, there’s basically, once you start providing and having the direct link to the customer around the core product or customer journey, other opportunities arise to free up again. Additional value and value proposition for the customer, and this has to do with economies of scope.
But one of the points of the economies is the scope is that essentially you start from a given a specific domain, and then all of a sudden you add extensions and complimentary products and service that are not necessarily belong to the same domain, but in fact, they bring value, particularly because they expand the boundaries of what were well-defined markets before. That’s the challenge when we come to regulations; how do we fix stuff as a way to assess the dominant position of a given firm.
Let’s say the domain of the concept, right? We might assume that it’s obsolete for the current situation. So if it’s not that, how can we develop a theory of fairness or unfairness or if we want to use the superior bargaining position. I think that we need, therefore, two anchoring points. The first is a redefinition of what does the relevant unit of analysis in terms of the domain of the competitive landscape. So the domain of competition. Where do this firms act? Where is it that we need to look in for the relationship?
For those interested, I have a working paper with colleagues of mine, Michael Jacobides and Annabelle Gawer, where we try to put their fair work to shift from what used to be the market failures to what is more relevant into the digital space, which is ecosystem failures. We speak particularly about two types of failures two thoughts: one is functional failures, which is the inability to create additional further value, or if you want activities or conducts that are put by the firms that will limit the ability of the ecosystem to create value for the customers.
And the other one would be basically seen as increasing the pie, so not the bilateral, because we cannot speak any more about bilateral. We need to speak about multilateral relationship within the actors that belong to a given ecosystem to create basically to increase the pie, so to create more value. And that’s one issue. We have to look at that as a first point, and the other issue has to do with distribution of failures.
So again, conducts that might actually create excessive terms for some of the actors that contribute to this creation so that there is an uneven split of this joint value being created within a given ecosystem, and might also impede the split across ecosystem, so you put barriers so that you lock in both the customers and/or the providers of the service to a given ecosystem, and therefore you kind of impede competition with rivalry ecosystems.
Back to the domain; we really think that the relevant unit of analysis here is the broader ecosystem. The new structures of economic relationship that they’re putting in place, rather than just the individual, bilateral transaction between firm A and firm B. That would be too narrow a focus, in our own perspective, and we’ll miss both and eventually some of the efficiencies that might be free out. There might be some conduct that might look uneven, or even unfair, if we take as a unit of analysis, the specific relationships.
Take, for instance, an in a very narrow, vivid example of Apple and Epic Games. Their battle over, how do you, whether it is allowed for Epic Games to side loading, basically, the apps and bypass the App Store of Apple. Now, if we just take the individual relationship here, it might be very clear that this might be in a very uneven and unfair position on the side of Apple, but what we don’t know yet, and this is why I think that it’s a job for all of us.
To jump in terms of research, is that we don’t know yet what does that particular practice do to free up more value, and in a specific way in the overall, for the overall ecosystem of Apple, and also vis-a-vis the rival ecosystem. To the extent that that creates a unique way of producing value that differentiates the Apple ecosystem versus the Android ecosystem, and therefore creates more competition across the ecosystems while limiting activities that some participants can do in that ecosystem. I think that that is where we should go in terms of you know, to the analytics, and then also some of the ex-post analysis to understand what are the conditions that might ex-ante lead to these functional and distribution failures within the ecosystem.
Carmelo, yours is a very interesting question, because as an antitrust practitioner, in order to assess the market power as a precondition, you need to try to define the relevant market. But in the digital space, as you noted, we’re talking about broader ecosystems, rather than just focusing on a small set of the market.
Elizabeth, I think you, as an economist, might want to speak as to what you’ve seen on this issue, because these days in many countries, including in the United States, Korea, and elsewhere, the governments are trying to promulgate ex-ante legislations on the digital market. For instance, in Korea, the Korean government is trying to promulgate Online Platform Fairness Act. We all know these efforts are underway in Europe and elsewhere. So, Elizabeth, what’s your views on this effort to promulgate ex-ante legislations on the digital market versus, as an antitrust practitioner, both as a lawyer and an economist, you’re more familiar with ex-post cases specific assessment of the market.
Thank you, Youngjin. I think this is such a huge topic and how to ex-ante regulation versus ex-post enforcement and there’s the tradeoff between type one error versus type two error. In other words, “You got it wrong before” versus “you got it wrong afterwards.”
I think, especially for digital platforms, there’s so much uncertainty on one hand and so much innovation on the other hand, like Carmelo was saying earlier, that innovation can bring huge benefits to consumers. Without a solid understanding of what’s in the pipeline, would the corrective regulation lead to consumer benefit? I would caution to do any preempt regulation, especially on this very important, very innovative industry.
Okay, thank you very much for your views about this important issue. Elizabeth, I’m just wondering whether the competition assessment should move to reflect fairness in competition assessment. Is there an intelligent or sensible line for assessing abusive conduct in abuse of the superior bargaining position. Of course, Andy shared with us difficulties each agencies are facing in enforcing superior bargaining position related law.
Yes, I think what Andy said earlier, reflecting the Taiwan enforcement activities on superior bargaining position, is a very important background for my discussion. One thing on my mind that confused me of the abuse of superior bargaining poweris what is the economic foundation that superior bargaining power, and why it would cause harm?
So let me be provocative there. Let’s assume, first of all, the trading partners have uneven bargaining power to begin with. In the business reality, it’s very, very rare that trading partners would have even bargain power all the time, so it is common that they will have uneven bargaining power.
And second of all, especially in the vertical relationship setting, Andy mentioned earlier in the enforcement, one party, such as a small vendor, would enter into a contract with a huge retailer, and their bargaining power are uneven. So, for argument purposes, let’s assume that the small vendor has to take a very low price to sell to this huge vendor.
Then the question is how to take into account the cost savings from the retailer perspective, because of this, again, very low favorable price.This cost saving can pass on to consumers by consumer paying a favorable price.
For example, I’m a Costco customer. I enjoy going to Costco because the price is low. So how do we evaluate the consumer benefit from getting a lower price, a cost saving portion, versus the unfavorable pricing term the vendor has to suffer when its dealing with Costco.
Back to the competitive analysis portion, again, if we think about the traditional antitrust analysis, or competitive analysis, there has been a lot of economic literature, and decades of antitrust enforcement can give us guidelines on how to think about those processes. In its guiding principles, we look at the competitive effects, such as whether that specific conduct leads to higher prices or lower quality or less innovation, and that’s the competitive harm caused by that conduct.But purely by having uneven bargaining power,it’s not obviously clear to me that in itself will cause competitive harm.
But the second part of the question, Youngjin, is very important: what is the line there? I think, to also go back to what Andy mentioned earlier, to the extent that superior bargaining power reached the level of market dominance, then we have a lot of case laws. We have a lot of analytical framework to explain that a dominant firm can cause harm and there are ways of correcting them.
Let me get back to you, Youngjin. Those are my thoughts on that.
Great. Your observations are very well taken. I think that while you were sharing your views on this issue, Andy was smiling, so I think Andy has something to say about what Elizabeth said.
Thank you, Youngjin.
First, I would like to say something about what Carmelo had commented. I must say in Taiwan whether the superior bargaining position theory could be applied to digital platforms is still under discussion. We still have no consensus about whether Article 25 could be applied to the digital platforms, but it’s an emerging issue.
I couldn’t agree more with Carmelo, because I also think what is more important is the ecosystem competition between different ecosystems, and by applying the superior bargaining position, it tend to induce people to look to minutely on the vertical relationship, all these details about a contractual term, how many, what’s the portion that the party that has the superior bargaining position could take. What kind of harm we are due to his contractual counterparts? But actually, as I mentioned earlier, that is really not a competition issue. That’s probably more like an unfair contractual issue. That’s the first point I would like to make and also a reason why I was smiling.
The second point I want to make is that I think the superior bargaining position might lead to the unpredictability of the enforcement, at least from my personal experience in working for the enforcement agency.
As I mentioned earlier in my speech, I still think the traditional SSNIP could absorb the concern we have by applying the superior bargaining position, because if you really rely, if you really have a very serious or heavy economic dependence upon the other party, then it means that when he or she raises the price and you still contract with him or her, you won’t switch. So you create a narrow market, and your contractual counterparty will have higher market power. We can still punish or stop the unfair conduct by relying on the conventional antitrust analysis.
Suppose, on the other hand, we try to abandon the traditional analysis. We try to create the new theory, something like a superior bargaining position, then it will force the enforcement agency to look into a plethora of subjective motives in order to find out what kind of motive is behind those transactions, especially when one party enjoys superior bargaining position over the other. Why is this less powerful party still want to keep on the existing relationship with him? There are plethora of motives, subjective motives, behind those transactions.
I think that’s the first challenge, and you will find that, if you don’t want to observe the objectively observable, the switch of a supplier in response to a 5% price increase, then you move on to delve into the subjective factors that will cause more uncertainty.
And what is more challenging is how can an enforcement agency establish the causation between the superior bargaining position and those motives? You need to determine whether this is a transaction motive, transaction decision is based on the superior bargaining position. I think it is more unlikely for the enforcement agency to have the correct answer in dealing with that.
That’s the reason why I say if we can use the traditional SSNIP to determine market power, then maybe it would be better for us to change the course of relying on the superior bargaining position. So those are two points I would like to make and to share my view with the rest of panelists. Back to you.
Sure, Andy. Carmelo, you do you have something to say about it?
Yeah so, I mean, I really appreciate it-
It sounds like you have a burning question.
I think that, again, I would like to go back to my point, which is, and some of the points also that Elizabeth was making there: why are we regulating, the uneven position? Often this is done traditionally, because on the basis that, in a vertical traditional value chain where value moves from upstream to downstream to the consumers, those that have and enjoy this bargaining power upstream in the relationship with the suppliers, usually it is because they derived that power from their dominant position downstream in the market. So basically, they are in some sort of a monopolistic position downstream, and that is reflected into their superior position, or uneven bargaining power, upstream. If this was not the case, then, even if you have this uneven bargaining power for the suppliers, there’s is always an opportunity to switch.
To other players in the market because, you will still address in a large supplier or a large player in the market, the store. Your business will not be tremendously affected. Now, therefore, so this economic dependency doesn’t derive from the fact that there is this uneven position, but from the fact of the structural conditions that are downstream in the market. If we were to flip this onto the digital space, then again, we will need to look at what is the dominant position that some of these players may have in the digital space.
That has goes back to the questions of ecosystems. So, do you control the only powerful ecosystem, and that is that the only venue for the, let’s call it the supplier, to have their goal, yes or no? And what does that conduct that is imposed by the orchestrator the ecosystem upon its uneven bargaining position does to the overall value that is created in the ecosystem.
If Amazon imposes more restrictions, and most of the time, Andy, it’s not just about price, but it might be that they’ve raised the cost for the supplier. In the case of Amazon, for instance, if Amazon imposes restrictions for the suppliers to hook into their Prime services and so they have to make their products available in an Amazon warehouse and then they have to accept the shipping back when return from the customers no matter what conditions, imposing additional costs for these sellers to provide their products and service through the market.
And so, of course, Amazon imposed this unilaterally, so take it or leave it relationship. It doesn’t have to do with just one specific relationship, but it applies to overall to everybody. That’s a “fairness” into what can be the unfair position.
But we have to look at what does this do to the overall value for the customer. Does it increase value for the customer, or does it just impose the cost on the providers? In the case of Amazon, there are also studies that shows that it does increase the market size. It increases the pie, because then customers, because of this additional feature, it improves their customer experience, and they are more. They’re shopping more easily, right? They are less reluctant to put that product in the cart because they know they can return it any time. This hasn’t shown to be increasing the pie.
There is a more subtle question though: value creation, this is positive. Now there’s a more subtle question on value capture, better distribution, because this seems that the financing, the efficiency financing, I mean, that this practice has comes at a cost that is imposed primarily on the providers of the service and not on Amazon. In a sense, Amazon is exploiting the efficiency of the distribution network that it’s creating. And then, this governance rules where the cost seems to be just paid or born by the providers of the service rather than Amazon in itself. In that I think that there are some greater details, than whose on the split of the cost. That needs to be explored.
My point is that it might not be derived from the fact that you just impose more stringent conditions to that because those can be positive overall, but they might be to the fact that there is an uneven split of those costs. I mean for creating more of this, more of the pie that might be uneven and that’s where probably we also need to go if we just look at the vertical relationship, we will never get to this deep level of detail, I think.
That’s an excellent point. Let me ask all of you these questions: I’ve seen some trend that is, as you all know, proving dominance is quite an undertaking. The agencies, particularly in Asia, especially in Japan and Korea, I think before this matter.
Andy, you might have something to say about it, but these agencies are increasingly trying to rely on superior bargaining position to tackle, assuming the potential wrongdoings involving the big platform companies. So, my question to Andy is, do you think that is primarily driven by the difficulty of proving dominance or because of nature of the digital market and ecosystem, agencies might be more interested in using this particular technique to address some of the challenges and the policy issues they haven’t paid attention to in the past.
I think the application of a superior bargain to the digital platform is based on the, partly based on the frustration that the enforcement agency could correctly and precisely figure out what those industries , what this digital platform is developing towards what kind of direction. But the demand for protection or address the potential consumers harm is quite large, getting larger, at least in Taiwan. I always think that a superior bargaining position is kind of standing in the middle of two extremes. One extreme is the traditional antitrust analysis, which we emphasize the effect-based analysis. On the other side is what we call the unfair case, which is purely conduct based.
We look into the conduct and see whether they are fair or not. But digital platforms specifically bring the challenges to at least the Taiwan Fair Trade Commission, because it is a competition issue. If you take into account the complaints to the TFTC, most of the complaints, will say the digital platform is competing unfairly against the focus and the domestic platform. So, they have the competition element there, but they have also an unfairness element there, especially if you look at the split of revenue between the media and the digital platform.
I think that’s the issue that is hotly debated or discussed in Australia or gradually all around the world. It’s more likely a fairness issue but we also, the fairness issue is also connected to the competition issue. So, which one should be placed at a core? Especially in Taiwan, there’s one more feature about law because the Taiwan Fair Trade Act puts unfair practice and the conventional antitrust cases within the single body of law. Each time you analyze the case you face the question, do we need to evaluate market power or do we simply look at the conduct itself?
I personally always think the superior bargaining position is the product reflecting the struggle between which side or which part of the spectrum should be placed the enforcement center. We kind of invented an idea about the superior bargaining position, at the same time, that theory could take into account fairness. Also, because it’s a superior bargaining position, it has something to do with the market power. You kind of mix, but also we can address those fairness issues within the context of the traditional competition issue. So there might be, at least from my personal opinion, that might be one of the explanations that why Taiwan, or another country in Asia, we frequently need to deal with those protection of domestic business or protection of small medium size and not to mention about a consumer’s interests, protection consumer interests. They may be part of the reason why superior bargain position is more favorable or more welcomed or more regularly applied in the Asia region then instead of the, maybe in the United States or in a Western country.
That’s my personal view about your question. Back to you.
Great. Elizabeth, do you have any thoughts about it?
Yeah, I think I echo what Andy observed about unfair competition, and that those two words are not always in perfect harmony in Asia, and that the enforcement was likely focusing a little bit more on the unfair part than the competition part. However, from economics perspective, the traditional competition analysis has the focus primarily on the competition part. They’re a little on the unfair part, as I said earlier, because unfair is not a traditional economic concept.
We understand efficiency, we understand consumer welfare, but we don’t understand what unfair means. Carmelo was explaining and articulating some great arguments that there’s new thinking: how do we think about fairness in the digital platform in the digital ecosystem. And that’s where the huge of amount of development and progress needs to be made so that we can reconcile the two in a better way.
But my general takeaway is that no matter what that unfairness definition is, we need to have a solid economic foundation for why the conduct, whatever we call it, abuse of superior bargaining power or abuse of market dominance position, and that needs to be rooted in economic foundation to explain how that conduct would cause consumer welfare to be decreased after the solid analysis, rather than speculating and facing that uncertainty of ex-ante regulation.
Great. Carmelo, do you have anything else to add.
I think that, what has been said, I agree with both views, and particularly with the call raised by Elizabeth that we need solid economic foundations. For that, there’s only one route to this, which is in a research-based and research-driven policy.
I appreciate the need and the pressure that is on politicians in across the board to kind of tackle this issues, but we need to go step by step. So before jumping into policies that might not be necessarily useful, let alone valuable, to get to the final consumers or to the business users in their relationship, but nonetheless than might be sticky and therefore hard to change over time. I think that we inject subjectivity and lots of discretionary power onto the regulators and the enforcers, which I don’t think is actually necessarily a good way to proceed.
I’ll stop there, and I think that, just as a final note, really very brief, something that’s more of a provocative statement: do we need the concept of dominance? I mean for the digital space, there are several new constellations. There’ll be consistent that not necessarily have a dominance. They’re not dominant by any standard. Even if we take on whatever analysis, we take all other alternatives up there. Nonetheless, there might be structural conditions for why these become competitive bottlenecks so that even if there are just a niche of the broader spectrum of services. There are powerful niches so that customers and users are locked in, and therefore we still have issues to address, even if they are not dominant from a competitive point of view. I say, in that case, we should intervene. I think that by taking that point of view, we can elaborate theories that move away and closer to what is the digital space reality.
Yeah, that’s certainly a provocative statement, but I think that isn’t something I would have to consider in light of the unique nature of the digital economy.
Let me also share my observations after hearing what you had to say: unfairness is an elusive concept in competition enforcement. While it maybe potentially hopefully in addressing some type of unfair conduct in the economy. You may also run a risk of compromising the establishment analytical framework that having developed over many years.
Competition assessment is highly fact-driven and evidence-driven exercise, they’ll would provide, provide analytical rigor in competition assessment. If we want to use unfair competition a little more broadly, like for superior bargaining position or whatever you name it, we need to come with the framework that will provide a predictability of the outcome in competition law assessment. Unfortunately, while it seems like we could spend most of our time discussing this a fascinating topic in more detail but that will have to be the work of another opportunity.
I would like to thank Elizabeth, Vice-Chairperson Andy, and Professor Cennamo for taking time out of your busy schedules to join us today. Thank you so much.