Examining Digital Dominance: Evaluating Behavioral Evidence in Multi-Sided Platforms

Introduction

At the core of competition law enforcement, is the concept of dominance. Traditionally, dominance is assessed through a structural analysis of the market, which typically involves demarcating and identifying the relevant market. However, dominance may also be evident with a behavioural analysis due to inherent market characteristics. Nonetheless, the rise of digital ecosystems has introduced certain challenges that hinder this paradigm. This article evaluates these challenges and proposes a tailored approach to address them, which relies on the interconnectedness of conventional and modern methods.

Two-Sided Markets and Network Effects in Digital Platforms

Digital platforms operate in two-sided markets and act as intermediaries bridging the gap between consumers and developers. Platforms similar to Google Play Store demonstrate unique features that distinguish it from traditional markets. For instance, a key differentiator between platforms and traditional markets is the presence of indirect network effects, where the value of the platform increases as the number of users on either side, developers or consumers, grows. Additionally, closed ecosystems, such as Google’s, restrict both hardware and software compatibility. This reduces cross-platform interoperability and, with it, raises entry barriers for competitors. These dynamics often lead to market tipping, where network effects drive one platform to dominate. This makes it difficult for new entrants to compete effectively.

The Structural Approach

The indirect (structural) approach brings forward the importance of defining the relevant market as a fundamental step in assessing dominance. This form of competition analysis has been confirmed by the European Commission (EC) as well as the General Court (GC).

The identification of the relevant market involves tools like the SSNIP test (Small but Significant and Non-Transitory Increase in Price). This tool determines substitutability by checking whether small increases in price will cause a shift in consumer behavior by switching to other products or services. However, the GC, in Contact Software, emphasized that market definition is an economic exercise as well as a legal construct.

Defining the relevant market for digital platforms is a challenging task because of their unique nature. App stores operate as multi-sided platforms, i.e., they simultaneously serve developers who require distribution channels and consumers who seek applications. This two-sided nature makes it more complex to analyze using traditional market analysis since there are interdependencies between the two sides. The authors argue that alternatives such as web apps and competing operating systems provide viable substitutes. Nonetheless, the EC has exhibited inconsistency in its treatment of substitutability. For instance, in Apple/Shazam, the EC identified a single market for music streaming services across all operating systems. However, in other cases, such as Google Android, the EC assessed the market for app stores specifically within the Android ecosystem, and the Commission defined markets more narrowly based on the constraints imposed by a specific platform.

These inconsistencies are a testament to the challenges of applying a structural approach to digital platforms.

The Behavioral Approach

The direct approach to assessing dominance evaluates whether a firm’s conduct, such as exclusivity agreements or pricing strategies, provides evidence of market power. Proponents of this method argue that behaviors suggestive of anticompetitive intent can be indicative of dominance. However, in Contact Software, the GC clarified that abusive behavior alone cannot prove dominance without first establishing the relevant market. This is because practices like exclusivity arrangements or price discrimination can be employed by both dominant and non-dominant firms, because of reasons of efficiency or competitive parity, rather than reflecting an abuse of market power.

In the context of digital markets, direct evidence frequently focuses on pricing strategies or barriers to entry. For example, in Pelikan/Kyocera, the EC ruled that dominance in aftermarkets must consider whole-life costs, i.e., they should recognize that consumers evaluate downstream costs, like maintenance or consumables, when making initial purchasing decisions. Therefore, while CCI has recognised that Google has control in the app store market through its Play Store, this control does not necessarily become overall market power, as consumer choices are still influenced by multiple factors beyond app store restrictions. This is supported by literature on multi-sided platforms literature on multi-sided platforms, which says that dominance over one side of a platform does not automatically confer absolute market power, which says that dominance over one side of a platform does not automatically confer absolute market power. Moreover, multi-sided platforms operate in a manner that makes it important to evaluate market power in a broader manner that takes into consideration interactions among various user groups.

These observations are directly relevant to determining Google’s market power because the Play Store functions within this multi-sided platform structure. Furthermore, contestability and innovation play pivotal roles in digital markets. Existing literature suggests that dominance in these markets tends to be transient, largely due to the rapid pace of innovation. In Cisco, the GC acknowledged that in fast-evolving markets, market shares can be fleeting, as new technologies or competitors emerge quickly. Hence, digital platforms, such as Google or Apple, are constantly threatened by competitive pressures from new entrants, which limits the ability to engage in monopolistic behavior. This ongoing threat of competition ensures that any monopolistic advantage is not likely to persist over time.

Market Share as a Proxy for Dominance

Traditionally, market shares have always been an important factor in determining dominance. Under EU law, a market share exceeding 50% often gives rise to a presumption of dominance, which indicates that a firm may have the power to set prices or control supply in the market. However, this conventional benchmark may not be entirely applicable in digital markets, which are characterized by relatively high market shares but also low barriers to entry. The nature of digital markets, where new competitors can rapidly enter and disrupt the status quo, calls for a more sophisticated approach than relying solely on market share thresholds to infer dominance.

In the case of digital platforms, the authors argue that market share within OS-specific app stores, such as Apple's AppStore, cannot by itself prove dominance. It is critical to also consider cross-platform alternatives when defining the relevant market. Even if Apple holds a significant market share within its AppStore, it is effectively competing with alternatives such as the Android operating system. For instance, in Facebook/WhatsApp, the EC concluded that consumer communication apps, regardless of the operating system, should be considered part of the same market. Similarly, a holistic view of app distribution that includes alternatives across various platforms such as web apps and other OSs, dilutes the argument that AppStore constitutes a dominant market. This market context reflects the competition Google and Apple face beyond its own ecosystem, which weakens the case for dominance based solely on app store market share.

Competitive Constraints and Consumer Behavior

Competitive constraints are essential in preventing even powerful players from acting independently of market forces. The market power is mitigated by several factors. Firstly, alternative distribution channels such as web-based apps and cross-platform services provide developers with the opportunity to bypass AppStore, which reduces its control over app distribution. Secondly, consumer choice plays a significant role, as consumers consider not just app availability but also the downstream costs associated with smartphone purchases. Despite the fact that developers and OEMs are the platforms’ direct users, customer tastes influence app store dynamics. Smartphone customers may choose a certain device based on factors such as app fees and repair costs, as seen in cases like Pelikan/Kyocera. As a result, app developers may compete with one another to attract developers and end users by optimizing their pricing and rules. This increases the scope of consumer decision-making. Finally, the threat of innovation ensures continuous market contestability. Together, these factors limit power and make it such that the conduct of any undertaking will be guided by competitive pressures.

A closed ecosystem creates consumer lock-in. This makes the user switch to alternative platforms, thereby inflating the market power of the platform. However, switching costs have been consistently declining in the modern digital economy. As developers increasingly optimize their apps for web-based platforms and cross-platform solutions, consumers face fewer barriers to switching between platforms. This growing interoperability ensures that switching costs are minimal. As consumers have more choices and greater flexibility in app usage, the impact of potential lock-in is greatly reduced.

Observations on Dominance and Abuse

Abusive practices are often conflated with dominance, but as established in Contact Software, dominance must be assessed separately from the conduct of a firm. Not every restrictive or exclusive practice signals market abuse, as these behaviors can be driven by pro-competitive motives or part of legitimate business strategies. That is to say, practices that appear to limit competition may still be serving broader goals, such as improving efficiency or benefitting consumers. It is important to distinguish between conduct that reflects a firm’s dominant position and practices that arise from business strategies that do not confer dominance because only the former can raise antitrust concerns.

In evaluating dominance in digital markets, emerging economic standards advocate for a broader analysis. Dynamic competition is a key factor in this context, where market power must be assessed through the lens of innovation cycles, as underscored in Cisco. The rapid technological development and constant innovation of digital markets make traditional market analysis less relevant. Additionally, the multi-sided nature of digital platforms requires a perspective that takes into account both sides of the platform and the mutual effects between them.

In digital markets, traditional measures of market dominance, such as market share and pricing, are increasingly inadequate. Emerging economic standards advocate for a broader analysis that considers dynamic competition, multi-sided platforms, and consumer welfare. Dynamic competition, as given in Schumpeterian theory, deems innovation as an important driver of market shifts, while multi-sided platforms create network effects where the platform’s value grows as user participation increases, which amplifies market power. Modern competition policy prioritizes consumer welfare over competitor protection, which ensures that aggressive business strategies are assessed based on their impact on consumers rather than on rivals alone.

For Indian context as well, these considerations are also very pertinent. CCI has been proactive in addressing challenges raised by digital markets. For instance, CCI conducted raids on major advertising and broadcasting firms over allegations of price collusion and ad rate fixing, which demonstrates increased scrutiny and enforcement activity in digital markets.

Moreover, the CCI has investigated e-commerce platforms like Amazon and Flipkart for allegedly favoring certain sellers, which could harm competition and consumer welfare. These investigations bring out the need for a broad understanding of multi-sided platforms and the importance of shaping dynamic competition to foster innovation and protect consumer interests.

To address these technicalities, the authors propose a two-tiered approach: First, an ‘Innovation-Adjusted Market Share’ system that weights current market position against innovation metrics, which would allow dominant positions to be discounted, based on demonstrated innovation capacity; and second, a ‘Cross-Platform Substitutability Test’ that quantifies user switching behavior using real-world data, with markets showing annual switching rates regardless of market share. These methodologies could supplement, rather than replace, traditional market definition practices. They may offer a more nuanced picture of market power in digital ecosystems, where boundaries are fluid and competition is multidimensional.

Finally, sustainable competition policy emphasizes the protection of competition, not necessarily competitors. This means distinguishing practices that harm consumer welfare from others that may disadvantage rivals without harming consumers.

Conclusion

The assessment of dominance in digital markets requires an adaptable approach that incorporates the following principles:

1. The market definitions must be sufficiently broad to include substitutes across platforms as well as technologies, thus not being too narrow. A relevant market should ensure that it encompasses all potential alternatives for both consumers and developers like cross-platform options and emerging technologies.

2. Structural factors and behavioral factors should be fully studied. Relying only on one type of evidence may lead to a failure to consider aspects of market functioning and competitive pressure.

3. The ultimate goal of competition policy should be to protect consumer choice and innovation rather than simply protecting competitors from the forces of competition. Practices that benefit consumers and harm competitors should not be presumed anti-competitive

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This article has been authored by Aryan Sharma and Tania Bagwe, students at the Maharashtra National Law University, Mumbai. This blog is part of the RSRR's Rolling Blog Series.