E-Commerce Competition Enforcement Guide

Mexico

Creel Garcia-Cuéllar, Aiza y Enríquez SC

E-commerce has transformed the way in which businesses work and think by creating new distribution and supply channels but it has also revolutionised how people are made aware of and acquire goods and services in practically all industries, as alternatives for consumers are virtually unlimited.

Digital markets have significantly altered traditional structures, and that represents both opportunities for new businesses and challenges for competition authorities, which in some cases may require reconsidering traditional doctrines in the light of new competition models and standards.

In the past few years, the shift into the digital world has opened up an opportunity for digital platforms to play a significant role in redefining traditional economic criteria. Given the fast-growing nature of the digital sector and constant changes in business models, traditional competition models have been insufficient, which presents a challenge to adapt regulations and to strengthen competition authorities to balance innovation, fairness and freedom of choice among market participants.

To better determine how competition law should address e-commerce, first it is imperative to fully understand the digital economy, which can be defined as economic activity driven by digital technologies that enable parties to trade goods and services (including digital content) through e-commerce.[2] Additionally, the digital economy also has effects on society and markets that go beyond the development of digital technologies, creating more challenges to competition authorities when it comes to enforcement.

The key factor involved in the digital economy is the use of digital technologies that facilitate the exchange of goods, services and digital content, considerably increasing economic growth by eliminating geographical barriers, reducing costs (such as distribution costs) and allowing the entry of new undertakings, which traditionally would be considerably more difficult.

However, competition in the digital economy has very specific characteristics such as high innovation, growth and dynamism; network effects and critical mass requirements; a tendency towards ‘winner takes all’ competition; multisided markets; and platform-based models. These specific characteristics reshape the way in which competition authorities identify competitive concerns and creates a risk that traditional economic models would be incorrectly applied.

In the digital economy, the way in which undertakings and customers interact involves certain special features, since there is a direct link between them, allowing different forms of operation. For example, some e-businesses operate in the form of marketplaces, which involves digital multisided platforms on which various retailers operate, generating a continuous contact between buyers and sellers through a well-known site; likewise, advertising services may be offered by enhancing search rankings and facilitating access to a specific service.

Marketplaces can offer intermediary services and act as hybrid models: the former by being a hosting service for third party sellers, and the latter by offering products and services through its own platform, alongside products offered by third parties.

A very important element of analysis in considering the digital economy that lately has been of special interest to competition authorities around the world is consumer data collection, which enables a more effective and tailor-made search engine for consumers based on their apparent preferences. The potential antitrust issues that could arise from this data collection have not been determined. Many commentators and even authorities have commented on how they could represent a barrier to entry or create other competition problems.

According to eMarketer, in 2017, retail e-commerce sales worldwide reached US$2.304 trillion, approximately a 24.8 per cent increase over the previous year. Mobile was a key factor, as m-commerce accounted for 58.9 per cent of digital sales.[3] Due to this continuous growth, in recent years, competition authorities around the world have focused their attention on the functioning of digital markets, as evidenced in the different investigations initiated in this sector. For example, the Mexican Federal Commission for Economic Competition (COFECE) initiated an investigation into potential abusive practices in the market of e-commerce platform services in Mexico.[4] COFECE stated that this was the first time an investigation on digital markets had been opened.[5]

In these efforts by competition authorities to understand better the functioning of the digital economy and to develop regulations in line with this new environment, several questions have been raised on the appropriate manner of the analysis, or which tools should be used by competition authorities to achieve these goals and protect the dynamic nature of these digital markets.

Moreover, it is important to consider that most distributors or suppliers are active in both online and offline markets. Developing specific rules for only online markets could be challenging for competition authorities and there is a risk of wrong decisions being reached and inappropriate enforcement by assessing only a part of the market.

Another important challenge for the competition analysis of e-commerce is the recognition of retail multisided platforms. In e-commerce, marketplaces are an example of multisided platforms. They unite retailers who seek to sell their products and services, customers that are willing to buy, and advertisers seeking to draw attention to a given objective. The variation in retail multisided platforms online is the interaction of different groups of customers, each one with specific demands and preferences, but closely interlinked, since conduct by one group will necessarily affect the others. Multisided platforms normally also involve different pricing implications for each different group (customers, sellers or advertisers), since the platform may, for example, impose certain fees on sellers while consumers may be subject to a significantly lower fee or no fee at all.

From a competition law perspective, determining whether any of these players has a dominant position is a difficult task or at least it is likely to represent a challenge for the conventional monopolistic test, which would be less effective than in other markets. A platform may, for example, offer free services to its customers while costs are absorbed by sellers, implying a close interdependency between different types of user.[6]

In multisided platforms there are different issues that must be assessed to determine the existence of market power. First, the existence of different customer groups with individual demands, who constantly interact through a platform represents a problem, as although the different groups can easily be identified, their different demands are highly interdependent, as price increases or quality decreases directly affecting one group will necessarily impact the other, leading to a reduction of the general demand on the platform.[7] This symbiosis and common goal to increase demand (which benefits both sellers and consumers) drives the e-commerce environment. Second, cross-subsidies between participants in a platform may also occur, as one group can access the platform without incurring any costs, while the other group is charged to access the platform to offer products.

These complex payment structures turn the traditional small but significant non-transitory increase in price test (SSNIP Test) or hypothetical monopolistic test less effective.

A third point relates to innovation. Multisided platforms are continuously subject to incremental innovation, seeking to improve to attract more users to the different channels of the platform, be it as a consumer or as a seller. A disruptive innovation by alternative business models may quickly displace a leading platform. The interconnectedness of the digital ecosystem means that dynamic considerations that drive innovation are also present in e-commerce and should be considered.[8]

With the continuous growth of e-commerce, competition concerns of vertical restraints have become increasingly relevant in competition law in several jurisdictions and has driven discussions as to the approach that competition authorities should follow when analysing such vertical restraints.

For the vertical integrated manufacturers that choose to operate their own online sites to have more control over distribution, there is usually no risk of breaches of competition law. However, if the manufacturer is not vertically integrated and tries to limit or control the online resale of its products or impose contractual limitations (such as exclusivities or most favoured nation provisions), that may potentially raise concerns and must be analysed in detail to determine whether they pose an actual risk.

In general, there are two distribution models used by manufacturers for online sales, which should be analysed on a case-by-case basis to determine whether they have significant anticompetitive affects to consider them illegal. The first is the exclusive distribution model, which refers to vertical arrangements by which a supplier agrees to sell its products to one single distributor in one specific territory, which limits competition between different manufacturers by limiting the online retailer to only sell one specific brand.[9] The second is the selective distribution model, which refers to vertical arrangements by which a supplier establishes minimum standards for admitting a manufacturer in its distribution network. One of the practices implemented in e-commerce is the inclusion of ‘internet addendums’ that include more restrictions for online sales.[10] This issue of course can be considered from the other side of the argument in that it offers a market when previously there was none.

Another important practice in the selective distribution model that has been analysed and deemed anticompetitive in Europe is the absolute ban on online sales.[11] In that case, a clause limiting the scope in which products can be commercialised (although the agreement did not contain a specific prohibition on online sales) without having an objective justification was found anticompetitive as it restricted competition in markets in which there is not a physical store – namely, online. The European ruling in this case has been highly controversial and some commentators believe that not all the relevant facts of the products and the specific industry were considered.

Additionally, vertical price-based restraints and their effects in digital markets have become an important topic of study, as they are often used in online platforms. Retail price maintenance is a restraint imposed usually by the manufacturer to the distributor or retailer, in which the manufacturer sets a maximum, minimum or fixed resale price to consumers.

Dual pricing, in which a manufacturer imposes different prices depending on whether they are sold online or offline, is also an important practice and may constitute a harmful vertical restraint. The European Commission has determined that these restraints constitute a hardcore restriction in different enforcement actions against manufacturers.

Moreover, there are non-price related vertical restraints in which the manufacturer can impose certain rules on the distributor or supplier such as: exclusive distribution to a specific distributor; selecting specific distributors that can commercialise a product; acquiring a product from one supplier (also called single branding); exclusive supply; and tying and bundling.

According to the OECD, although not all vertical restraints are harmful to competition, these practices can have negative effects in competition when they imply a market foreclosure, facilitate collusion or soften competition. Market foreclosure may be particularly harmful in concentrated markets and when the main participants implement activities (in any part of the distribution chain) to prevent other players from entering the market. Collusion may be facilitated either in the upstream or downstream markets through the dynamics followed by suppliers or manufacturers. Softening competition can be caused by the imposition of price restraints which reduce incentives to compete fiercely among suppliers or distributors (for example, allocating specific areas to distributors for the sale of the manufacturer’s products), which could grant certain market power to distributors in their exclusive territory.

Although competition authorities are working to ensure competition in digital markets, based on the technical knowledge required and the constant evolution of the digital economy, it is difficult to apply traditional competition laws and economic principles to this sector. This represents a continuous challenge as competition authorities will not only face technical difficulties but also geographical problems due to the global scope of digital economies, which requires cross-border cooperation between different competition authorities.

Likewise, the continuous evolution of the digital economy brings two main challenges to competition authorities: being able to conduct an analysis in a dynamic environment in which current circumstances can change rapidly; and being able to determine when the dynamics of the digital economy become a competition problem and in which cases enforcement of competition law is more effective.[12]

A clear example of this in the digital economy is an increasing tendency to open platforms: undertakings can encourage innovation by opening their platforms to enable third parties to innovate but this can also raise concerns if the undertakings seek to exclude third-party applications to protect their own vertical integrated applications or if they first seek to capture investment by third-party developers only to copy their applications.[13]

Accordingly, when it comes to the application of competition law to the digital economy, there are many elements that must be analysed to determine if the traditional principles of competition law reflect the reality of digital markets and their dynamics, or whether they require adjustment.

In general terms, there is a consensus among scholars, commentators and professionals that existing competition law principles are sufficiently flexible to adjust to the specific characteristics of digital markets and that specific regulations are not necessary. On the contrary, specific regulations may be inappropriate, since there would be a risk of eliminating the possibility of adjusting the rules to new business models and dynamics. Moreover, as most distributors have both brick-and-mortar stores and online sales, any assessment should consider the relevant players in both channels (offline and online) and the interrelation between them. Disregarding this reality can lead to inaccurate decisions by competition authorities.

Other options discussed by the OECD relate to the creation of specific regulations for certain practices in the e-commerce sector. That has been implemented by some jurisdictions such as the European Union with the creation of the Geo-Blocking Regulation, prohibiting certain business-to-consumer practices in online cross-border sales of goods and services, or the Macron Law in France, which prohibits the use of most favoured nation clauses in the hotel sector. Some competition authorities have also made the argument that specific regulations could eliminate uncertainties in the application of competition laws in the digital sector but as previously mentioned, specific regulations may also have disadvantages in preventing the flexibility of the law to adapt to unforeseen cases.

A different alternative analysed by the OECD has been the modification of consumer and data protection laws, aiming to regulate – to the extent possible – all aspects of e-commerce transactions. This may also fall short, as different rules among jurisdictions may constitute a barrier for cross-border online sales.

A key element that also needs to be considered when discussing the competition implications of the digital economy and e-commerce is data collection, as it allows (among other things) undertakings to acquire information about consumer preferences. This has led to discussions as to whether personal data may constitute an essential facility, raising the question of whether a policy for limiting data collection is necessary and even convenient. In that regard, data collection is not, on its own account, contrary to competition, as it does enhance innovation and benefits both suppliers and consumers by clearly identifying different market segments.

That said, data collection can also constitute a strong tool for algorithmic competition mechanisms that could potentially facilitate collusion or unilateral conduct. It has become necessary for competition authorities to analyse at what point data collection may constitute illegal conduct and how competition law should address some of the associated concerns. Consensus has not been reached on this topic and it is likely that competition authorities will continue paying close attention to it. A good example of an illegal practice committed through the collection of data was the Google Shopping case in which the European Union imposed a fine of €2.42 billion on Google for its abuse of its dominant position as a search engine. According to the European Commission, Google provided an illegal advantage to its own products in detriment to its competitors.[14]

Advertising also plays an important role in e-commerce and the digital economy. It has become an essential component and is highly integrated in almost all e-businesses and other digital platforms such as social networks. Together with data collection, users can easily be targeted with tailored-made advertising, affecting the competitive environment in the digital economy.

In conclusion, we believe the Mexican authorities are well equipped to analyse e-commerce with the tools and laws already in place. However, it is important that they understand that e-commerce has created new ways of doing business and modified the traditional interaction between economic agents and customers. Accordingly, authorities will need to adjust their traditional models. Platform owners, suppliers and distributors could be regarded as participating in different markets and therefore not as competitors. That conclusion, however, if reached without an in-depth analysis of the close interrelationship between traditional and non-traditional activities, could also cause unintended consequences – so special care is needed.

COFECE has approached the new business models in digital markets in some specific sectors, most notably in the financial sector, which have been recently regulated by the Congress in Mexico through the approval of the Law to Regulate the Technological Financial Institutions (Fintech Law).

The Fintech Law provides financial institutions guidance on the development and use of technology and infrastructure, so as to provide consumers certainty on the use of digital platforms, while at the same time promoting investment in the development of digital financial platforms. COFECE analysed the Fintech Law from a competition perspective and submitted to Congress some suggestions to promote competition and innovation in the services offered by fintech organisations. In this regard, COFECE suggested allowing fintech organisations to have access to information about platform users that is currently in the possession of the financial institutions. This information is seen by COFECE as an essential facility for fintech organisations to be able to compete effectively with traditional financial institutions. The Mexican authority considered that giving fintech organisations access to this information, without charging additional fees or imposing additional conditions to those imposed on traditional financial institutions, was essential to promote competition in the digital financial market.

The Mexican authority has indicated that the study of the development of new technologies and its impact on competition in different markets is very important. To establish a clear path in the study and analysis of competition in digital markets, it has issued a position paper[15] in which the differences between traditional and digital business models is analysed. In the near future we will continue to see the Mexican authority actively participating in all industry or sectorial discussions in which new digital business models are analysed. COFECE has promised to collaborate in the implementation of regulations that help to promote and enhance competition in the markets in which the digital economy is playing an important and disruptive role.

A balance needs to be struck between innovation and competition regulation to maintain innovation and investment, while at the same time protecting markets from potential harm. The role of Mexican competition authorities in the following years will be key to this purpose and may require adapting traditional concepts to the specific characteristics of the digital economy or by creating new regulations if needed in the future.

Another interesting feature of the Mexican institutional setting is the division of powers between COFECE as the competition regulator in all markets except for the telecommunications and broadcasting markets, in which the sectoral regulator, the Federal Telecommunications Institute, is the competition authority with exclusive jurisdiction. Even though there has not been a conflict with regards to e-commerce, there have been other cases in which the authorities have fought for jurisdiction in some markets and these disputes have ended up before the judiciary. It may not be different in some of these new markets.

There is no clear path to follow, but competition authorities will have to weigh the potential harm of a specific practice, against the potential detriment to innovation caused by any enforcement action in their decisions.


Notes

[1] Carlos Mena Labarthe is a partner, and Jorge Kargl Pavia and Aleine S Obregón Natera are associates, at Creel Garcia-Cuéllar Aiza y Enríquez SC.

[2] OECD Hearings, The Digital Economy, 2012, p.5.

[3] eMarketer, ‘Worldwide Retail and Ecommerce Sales: eMarketer’s Updated Forecast and New Mcommerce Estimates for 2016–2021’, 29 January 2018.

[4] Comisión Federal de Competencia Económica, ‘COFECE probes the market of e-commerce platform services in Mexico’, file number IO-002-2017, 1 February 2018, https://www.cofece.mx/wp-content/uploads/2018/02/COFECE-06-2018-COFECE.pdf.

[5] ibid.

[6] OECD Directorate For Financial and Enterprise Affairs Competition Committee, ‘Implications of E-commerce for Competition Policy-Background Note’, 2018, p.14 www.oecd.org/daf/competition/The-Digital-Economy-2012.pdf (The OECD Implications of E-commerce).

[7] ibid.

[8] ibid.

[9] OECD Implications of E-commerce, op. cit., p.16.

[10] ibid., p.17.

[11] Case C-439/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la Concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi.

[12] Ariel Ezrachi, EU Competition Law Goals and The Digital Economy, University of Oxford, 2018, p.1.

[13] OECD Hearings, op.cit., p.10.

[14] European Commission, ‘Antitrust: Commission fines Google €2.42 billion for abusing dominance as search engine by giving illegal advantage to own comparison shopping service’, June 2017, http://europa.eu/rapid/press-release_IP-17-1784_en.htm.

[15] Rethinking Competition in the Digital Economy (Repensar la Comeptencia en la Economía Digital).

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