The current development of the e-commerce industry in Taiwan
The invention of the internet has not only changed modern lifestyles and human behaviour, but also affected cross-border commerce and trade activities. E-commerce is now considered an important path for enterprise transformation and is commonly applied to various industries to win more business opportunities and generate higher revenue.
The survey of Directorate General of Budget, Accounting and Statistics of the Executive Yuan showed that the total value of online transactions amounted to NT$3.8033 trillion in 2017, which represented an increase of 7.41 per cent in comparison with 2016. In terms of the retail sector, statistics from the Department of Statistics of the Ministry of Economic Affairs show that the total revenue of non-store retailing (i.e., online shopping, television shopping, online auction and mail orders) grew by 12.4 per cent in Taiwan between 2017 and 2018, reaching NT$189.4 billion.
With the growing number of platform operators in the market related to online shopping and auction, the domestic e-commerce market has been facing increasing competition in recent years. Up to now, there have been three major types of service providers in the market: domestic shopping websites owned by Taiwanese companies, including PChome, Momoshop and Buy123; online shopping sites created by bricks-and-mortar stores and manufacturers with their own brands; and online shopping and auction platforms run by foreign companies in Taiwan or those sites with international shipping services – for example, Taobao, Shopee and Amazon.
Potential challenges of competition law enforcement
Lower costs, rapid transactions and the application of the internet beyond territorial boundaries are the main features of e-commerce. With these advantages, e-commerce is able to promote market competition, and reduce the prices of goods and services by minimising search costs and enhancing efficiencies in supply chain management. However, the inherent characteristics of e-commerce platforms (i.e., economies of scale and network effects) may raise certain anticompetitive concerns. The rise of market power possessed by platform operators may also draw increasing attention to competition policy.
Due to the characteristics of the e-commerce market, competition agencies face a number of challenges associated with enforcing competition law. These include unclear and obscure market scope and boundaries, network effects of two-sided and multisided platforms, and dynamic competition. In addition, various business activities in the e-commerce industry may concurrently lead to pro-competitive and anticompetitive effects. Therefore, a case-by-case approach is required to assess the rationale of business behaviour and evaluate anticompetitive and pro-competitive effects incurred by this behaviour when enforcing competition law. Whether a competition agency can address these problems effectively will be subject to its capability in investigation and analysis.
Enforcement activities of the Taiwan Fair Trade Commission
The following present the views of the Taiwan Fair Trade Commission (TFTC) on market definition and assessment of market power in the e-commerce industry, and clarify the TFTC’s enforcement policy by illustrating common e-commerce business practices or types of empirical cases.
Defining relevant markets and assessing market power
Characteristics of two-sided or multisided markets can be found in most e-commerce platforms. Network effects and subsequent feedback effects take place in these marketplace platforms, and the traditional approach to the one-sided market definition needs to be adjusted when defining the relevant market. In other words, a more tailored approach is required to define an e-commerce market involving a two-sided or multisided platform.
This approach should take into consideration the competition restraints on each side of the platform and incorporate the effects of the network and subsequent feedback loop as well as relationships among respective groups of platform users. In this context, the analytical tools applicable to define the relevant market include the reasonable interchangeability of use, a modified small but significant non-transitory increase in price test, the small but significant non-transitory decrease in quality test or the use of direct evidence focusing on competitive effects instead of defining the relevant market.
A relevant market under the Fair Trade Act (FTA) does not simply refer to a group of similar products or services. Rather, it comprises all products or services that are subject to competition constraints from each other. Given that competition constraints arise from supply-side substitution and demand-side substitution, factors affecting supply-side substitution or demand-side substitution, or both, should be considered in defining the relevant market. Regarding boundaries of competition among bricks-and-mortar shops and online stores, the TFTC may look into different transactional models, such as bricks-and-mortar shops, online stores and downloading from websites, so as to determine whether these models account for reasonable substitutability from consumers’ perspective in respect of their functions, features, purposes, prices or geographic areas. By assessing substitution factors on the demand or supply side, or both, the TFTC is likely to appropriately delineate the relevant market.
Although a high market share in itself does not necessarily establish the existence of market power, market share estimates often provide a useful starting point in assessing market power. In addition to production, sales, inventory, and import and export value (volume) data for the operator and the relevant market, the basis used for the calculation and interaction of network externalities among all sides of a platform is an essential element when calculating the market share of an e-commerce operator. If a customer group on one side of an e-commerce platform does not pay any fee for the use of a platform, no revenue data is available to calculate the market share. Therefore, transaction volume or potential value may be used as a proxy for the calculation of the market share. However, once market data is available for two distinct customer groups of a platform, their respective market shares should be considered to accurately include indirect network effects of both sides in assessing the market power of a platform operator.
Resale price maintenance
Transparent pricing information in e-commerce enables consumers to compare prices in a timely manner to make the best decision on price. Nevertheless, price transparency facilitates manufacturers or upstream suppliers to monitor price movements through online platforms. Particularly when prices offered by distributors or retailers do not meet original prices, manufacturers or suppliers can request online sellers to change their prices, and control resale prices of products by refusing supply or terminating distribution agreements. Sometimes, these manufacturers or suppliers may also file complaints to online platforms alleging that sellers’ web pages or content infringe copyright or trademarks of manufacturers or suppliers, urging them to remove their web pages to maintain the resale price.
Article 19 of the FTA prohibits resale price maintenance (RPM) without justification, which is applicable to product sales either over the internet or at bricks-and-mortar stores. When an enterprise implements certain measures to force its trading counterpart to sell its goods to a third party at a particular price, or impose indirect price restrictions on the third party to limit its freedom of setting prices, this practice prevents distributors from setting prices, which may vary depending on the level of competition and cost structure they face. Consequently, the level of price competition among distributors or retailers carrying the same brand name may decline. This is the rationale for the prohibition covered under Article 19.
As mentioned, RPM may result in a lessening of competition in downstream markets, impairing intra-brand competition in homogeneous products. It could even be used to facilitate collusion among market participants. However, in certain exceptional circumstances where RPM may be more pro-competitive than prices being set by distributors, enterprises are able to submit reasonable evidence to justify their RPM practices under a proviso of Article 19. When the TFTC reviews the evidence and deems the RPM practices as pro-competitive, the proviso can be applicable. In practice, the TFTC also analyses industrial structure (relations between upstream and downstream markets) and anticompetitive effects in RPM cases. To fulfil its obligations of elucidation under the Administrative Procedure Act, the TFTC will clarify all considerations, which can be used to justify RPM so as to prompt the enterprise under investigation to submit relevant evidence.
Online sales restrictions
Online shopping has continued to grow and become a popular feature of business models, whereby web-based retailers can compete with each other effectively based on more transparent transaction information. Now consumers usually look for goods and services they want and compare their prices online before they step into physical stores. By doing so, consumers are able to compare quality and prices of these goods and services, and they are likely to minimise transaction costs. This assists consumers to make the optimal decisions on their own.
When a manufacturer takes advantage of its market dominant position to prohibit distributors from selling online, it rules out opportunities for consumers to choose to purchase through alternative channels, and may restrict distributors’ freedom to decide business strategies on the basis of their strengths. Despite this, such vertical restraints sometimes can be pro-competitive to help solve the free-rider problem and protect brand identities.
As a result, when determining whether unreasonable online sales restrictions may have potential anticompetitive effects and violate Article 20(5) of the FTA, the TFTC follows the principle of ‘rule of reason’ to consider various factors. This includes the intent and purpose of the manufacturer allegedly imposing online sales restrictions, the relevant market structure and impact on market competition. More specifically, the TFTC will make its decision on a case-by-case basis to assess anticompetitive effects of online sales restrictions, including considerations around market power of the manufacturer, the types of contracts or agreements between the manufacturer and distributors (e.g., whether a distributor enjoys the ownership of products purchased from a manufacturer), and factual findings in connection with the existence of online sales restrictions as well as the accompanying punishment mechanisms.
The most favoured nation clause
A most favoured nation (MFN) clause is an agreement, usually signed by both parties who have an upstream and downstream relationship, in which the ability of the supplier to decide prices and transaction conditions with third parties may be limited. An MFN clause can lead to interrelated results on costs or prices of different suppliers, intended to be decided through independent and dispersed business decision-making systems. Provided that an MFN clause is found to be anticompetitive, it may constitute a violation of Article 20(5) of the FTA, which prohibits any enterprise from imposing improper restrictions on its trading counterparts’ business activities as part of trade conditions.
An MFN clause can be regarded as one type of vertical restraint with pro-competitive effects, while it may also generate anticompetitive effects. In terms of pro-competitive effects, an MFN clause can help to solve the free-rider problem, and can enable a platform operator to put more efforts into improving functions and services of its platform. It can also reduce search costs for consumers, minimise uncertainty around changes of prices or other transaction conditions, and thus increase consumers’ willingness to purchase. However, an MFN clause may eliminate a supplier’s incentive to offer promotion programmes, which may vary depending on different platform operators, and lead to price stickiness and raise competition concerns about collusion. Furthermore, existing platform operators can also leverage an MFN clause to maintain their market positions to discourage potential competitors from entering the relevant market using more competitive transaction conditions or sales channels.
In short, an agreement with an MFN clause does not necessarily bring about anticompetitive effects. It can have pro-competitive effects such as efficiency enhancement as with other vertical restraints. Therefore, in the process of reviewing an applicable case, the TFTC will evaluate the competitive effects of an MFN clause by examining the market scope covered by the clause, the substance of the clause, market structure and reasons to implement. The legality of an MFN clause may turn on weighing pro-competitive effects against anticompetitive effects, competitive dynamics and the level of competition among different brands in the relevant market under investigation.
Future prospects of competition law enforcement
Over the past few years, the e-commerce industry has changed and reshaped conventional models of business operations, but the fundamental principles of economic conduct still apply to commercial practices engaged by those firms running business in the e-commerce industry. In addition, the purposes of the FTA are to maintain trading order, protect consumers’ interests, and ensure free and fair competition. The term of competition refers to the ‘mechanism for market competition’ instead of any specific ‘industry’ or ‘competitor’. Accordingly, the FTA and relevant regulations are considered sufficient to deal with anticompetitive or unfair competition practices concerning the e-commerce industry. No additional competition provisions or regulations are required to address concerns directed specifically toward the e-commerce industry.
Although traditional analytical rules are applied to business conduct in connection with e-commerce, methodologies and tools for competition assessment unavoidably call for adjustment in law enforcement. In this regard, a comprehensive competition assessment in consideration of industrial characteristics and choice of analytical tools are crucial for the TFTC when it launches into an investigation and conducts competition analysis involving e-commerce.
Going forward, the TFTC intends to continually pay close attention to the international trends of competition law enforcement and dynamic developments of the e-commerce industry, and review whether it is appropriate for competition law or regulations to be updated or amended. In doing so, the TFTC would aim to close any potential loopholes and safeguard fair competition.
1 The Taiwan Fair Trade Commission is Taiwan’s competition authority, which is charged with drafting fair trading policy, laws and regulations, and investigating and handling various activities impeding competition, such as monopolies, mergers, concerted actions, other restraints on competition and unfair trade practices by enterprises.