Running head: DIVERGING APPROACHES FOR MFC CLAUSES 1. Diverging Approaches for Most-Favored-Customer Clauses:

Transcription

1 Running head: DIVERGING APPROACHES FOR MFC CLAUSES 1 Diverging Approaches for Most-Favored-Customer Clauses: Turkish Competition Authority s Yemeksepeti.com Infringement Decision Emin Köksal,* emin.koksal@eas.bau.edu.tr Bahcesehir University Şahin Ardıyok, sahin.ardiyok@dentons.com Dentons, Bilkent University *Corresponding Author Bahçeşehir University, Department of Economics, Çırağan Caddesi, No. 4, Beşiktaş, 34553, Istanbul

2 DIVERGING APPROACHES FOR MFC CLAUSES 2 Abstract This paper evaluates the diverging approaches for most-favored-customer (MFC) clauses considering the Turkish Competition Authority s (TCA) Yemeksepeti.com infringement decision. In respect to some aspects related to MFC clauses, the paper criticizes the decision which diverge from the European authorities relevant decisions. Interaction of MFC clauses with relevant market definition, network effects, and exclusionary abuse of dominance have been discussed with in the scope of the infringement decision. The main argument of the paper suggests that decisions without proper evaluation of the effects of sophisticated business models -such as MFC clauses- has two negative effects on the creation of novel business models. First it may constitute a business uncertainty for the value creation through new business models. Second, the legal advisory in such a legal environment may be highly conservative towards emerging business models. Keywords: most-favored-customer (MFC) clauses, network effects, exclusionary abuse of dominance

3 DIVERGING APPROACHES FOR MFC CLAUSES 3 Diverging Approaches for Most-Favored-Customer Clauses: Turkish Competition Authority s YemekSepeti.com Infringement Decision While new business models in the online world emerge at an unprecedented pace, interpretation of legal rules has lagged behind those innovations. In particular, interpretation of competition rules may be far from being a guide for the lawfulness of novel business models. On one hand, such an inadequacy lead to legal and business uncertainty, on the other hand it restricts the attorneys counselling clients contemplating the adoption of novel business models in the online world. The diverging approaches of competition authorities all around the world for mostfavored-customer (MFC) clauses have been the recent example of this phenomenon. Most of the competition investigations concerning the MFC clauses in different countries had closed with the commitments given by the investigated firms. Investigations concerning online travelling agencies in Italy, Sweden, France and United Kingdom ended with commitments that abolish some type of MFC clauses. However for a similar investigation, the German competition authority (Bundeskartellamt) has banned all type of MFC clauses with an infringement decision. Nevertheless, Bundeskartellamt approved the commitments of the investigated party and did not impose any fine. (see, Colangelo, 2016; Colangelo & Zeno- Zencovich, 2016a; Heinz, 2016) MFC issues are not only restricted with online travel agencies, e-book sellers and publishers have also been investigated on both side of the Atlantic. In United States, Apple and e-book publishers were investigated concerning the MFC clauses. While the court found that MFC is lawful, it concluded that Apple had facilitated a conspiracy for price fixing of the publishers through MFC clauses. In Europe investigations for Amazon.com have both took place at Commission level and country level, Germany. Although the investigation of MFC clauses at

4 DIVERGING APPROACHES FOR MFC CLAUSES 4 the Commission has started recently and not finished yet, Bundeskartellamt ended the investigation with the commitments about the MFC clauses. (see, Akman, 2016) In the meanwhile, an investigation started by the Turkish Competition Authority (TCA) concerning the MFC clauses of Yemeksepeti.com, an online food ordering platform, concluded with an infringement decision. 1 Although the commitment of Yemeksepeti.com was welcomed by TCA, the decision also imposed a fine to the company. In that sense, TCA s Yemeksepeti.com decision has contributed to the diverging approaches of the competition authorities for the evaluation of MFC clauses. TCA has also reinforced its view by its recent Booking.com infringement decision, as well. 2 This paper broadly aims to emphasize the legal and business uncertainty created by diverging approaches for MFC clauses. Since most of the investigations concerning the MFC clauses has terminated with commitments, we have not had much opportunity to learn much about the analysis of the authorities. Moreover, disparity in the evaluation of MFC clauses in infringement decisions has also increased these uncertainties. Therefore, the paper examines Yemeksepeti.com infringement decision in order to exhibit the problematic considerations of the TCA for MFC clauses. The following section introduces the background of the case to better inform the reader about the MFC clauses of Yemeksepeti.com. The third section, discusses the problematic 1 TCA, Board Decision, numbered 16-20/ , dated Retrieved March 12, 2017, from 2 The reasoned decision has not been published yet. Announcement of TCA is available at Bookingdotcom-Destek-Hizmetleri-Limited-Sirketi-concluded.

5 DIVERGING APPROACHES FOR MFC CLAUSES 5 consideration of the TCA concerning the link between market definition and MFC clauses. The fourth section discusses issues related with evaluation of abuse of dominance and misidentification of network effects and MFC clauses. The fifth section discuss the possible explanation of imposing monetary fine despite the commitments. The final section provides the concluding remarks. Background of the case On 18 March 2015, TCA started an investigation about Yemeksepeti.com for its certain conducts and for the MFC clauses in its the agreements with the restaurants. Yemeksepeti.com is the largest food ordering platform in Turkey which has also operations in nearby countries. The company s business model is based on gathering the consumers and the restaurants on its platform. It exhibits current menus of member restaurants to the consumers who are also the subscribers of the platform. The platform only charges the restaurants for each order given on its platform and doesn t apply any charge for the consumers. In that sense, the company applied a commission model rather than an agency model. The genuine business model of Yemeksepeti.com is based on offering the same conditions (including price) to the consumers that are offered by the member restaurants for their delivery services. This is n MFC clause named as narrow MFC. Later, the company have extended this beyond the restaurants own delivery services by including the rival platforms. This clause is named as wide MFC. TCA had started the investigation with respect to Articles 4 and 6 of the Competition Act, which may be considered as the equivalents of Article 101 and 102 of the Treaty of Foundation of the European Union (TFEU); respectively. However, in its decision, on 9 June 2016, TCA dropped all the allegations concerning the conducts of the platform, except the abuse of

6 DIVERGING APPROACHES FOR MFC CLAUSES 6 dominance through wide MFC clauses. The authority ruled that the wide MFC clauses in the agreements between Yemeksepeti.com and the restaurants has exclusionary effects in the market. Therefore, TCA banned to use of wide MFC clauses that oblige the member restaurants to offer the same conditions (including price) which they offer on the rival platforms. Moreover, TCA also imposed a fine with an amount of 428 thousand TRL (115 thousand EURO) to Yemeksepeti.com, because of its abuse of dominant position through its conduct via the wide MFC clauses. From the reasoned decision published on 13 January 2017, we have seen that Yemekesepeti.com had also provided commitments to abolish its wide MFC clauses in its agreements with the restaurants. Although TCA had welcomed those commitments, it did not refrain to impose monetary fine, unlike the counter parts in other countries. In fact, the decision of Yemekspeti.com can be criticized from several perspectives, however this paper focuses on the issues related with MFC clauses. Missing link between the market definition and the MCF clauses Definition of the relevant market seems one of the problematic part in the decision. It is problematic not because of being wrong, but it is problematic not to give any guidance for a solid understanding. In the decision, the relevant product market is defined as online food-ordering service platforms. However, no specific analysis was done to define the relevant market from the perspective of two-sided market. For instance, neither a survey was conducted specifically for the investigation (by the investigated party), nor the analysis of TCA was based on a survey which may had a potential to exhibit the real competitive pressure between the probable substitutes. Yet, in its HRS infringement decision, Bundeskartellamt, put account the survey

7 DIVERGING APPROACHES FOR MFC CLAUSES 7 offered by the investigated party and independent surveys for the industry. 3 Moreover, in Yemeksepeti.com decision no solid framework, such as the hypothetical monopolist (Small but Significant and Non-Transitory Increase in Price, SSNIP) test had been used as a conceptual framework while interpreting the choice of the relevant market. In the decision, the differences between the online platforms and restaurants own web sites and phone order services are evaluated. From the perspective of the consumers it was argued that online platforms provide more convenience then the restaurants own web sites or phone order services. It was argued that mostly because of those differences platform services and restaurant s own order channels are not substitutable. On the other hand, from the restaurants perspective, the main difference was emphasized as the network effects 4 which might only be created by a platform, not restaurants own order channels. Basically, based on those two considerations, TCA defined the market by isolating the restaurants own channels. However, there are two critics should be raised for this relevant market definition. First, if the restaurants own channels are not substitutable, what is the purpose of the narrow MFC clause in the agreements between the restaurants and the platform. If the role of such a clause is to eliminate the substitution between the restaurants own channels and the platform, why it was not mentioned/examined in the decision? Second, if TCA somehow consider the online platforms elsewhere, it was still expected to discuss the possible substitution in a comprehensive manner. For instance, a hypothetical monopolist test (SSNIP) test at least at the conceptual level- would offset the missing analysis and would shed light on real dynamics in the market. 3 Published decision of the Federal Cartel Office: HRS - Best price clauses Retrieved from 4 It was not mentioned whether it was direct or indirect network effect.

8 DIVERGING APPROACHES FOR MFC CLAUSES 8 The first issue, in fact paradoxically inconsistent with the existence reason of the narrow MFC clauses in the agreements between the restaurants and the platform. The main motivation of the platform to exercise narrow MFC clause is to protect its investments against the freeriding behavior of the restaurants (see, Ezrachi, 2015). The platform urges such a clause to avoid any divergence sourced form price/condition differences between the restaurants own channels and the platform. This sounds almost a perfect substitution between the restaurants own channels; and it was expected to be examined in the decision. Accordingly, TCA has not made any comprehensive analysis to examine the substitution between the other channels and the online platform services. For instance, discussing on the SSNIP test would shed a light on the availability such a substitution. As Evans & Noel (2005) and Emch & Thompson (2006) mentioned even for the multisided markets, defining the relevant market in an comprehensive manner is essential to analyze the competitive constraints. As the authors suggest, SSNIP test should be applied to do it in a solid framework. However, as mention by Filistrucchi, Geradin, Van Damme, & Affeldt (2014) in two sided markets, the SSNIP test cannot be applied in its traditional form. According to the authors, in two-sided markets, authorities should employ a modified version of the SSNIP test that fits the nature of the two-sided market. The authors suggest that in a two-sided transaction market -like the online food ordering- one should check the profitability of an increase in the price level. In doing so, the candidate products, other than the platforms may appear as substitutes. For instance, in their assessment for the card payment platforms, the authors suggest that the candidate products should be non-intermediated transactions, such as a direct rental or a cash payment (Filistrucchi et al., 2014, p. 303).

9 DIVERGING APPROACHES FOR MFC CLAUSES 9 If the TCA had discussed the substitutability issues around a hypothetical monopolist test at least at the conceptual level- it is not sure if it might arrive a different conclusion. However, we would get an understanding that the authority considers the substitutability between the alternatives around a solid framework. Since the MFC clauses are strictly related with substitutability, this seems a missing link that had to be established by TCA. Network effects or MFC clauses? Which is exclusionary? Although TCA started the investigation with respect to Article 4 and 6, later in the published decision, we learned that TCA has investigated the conducts of Yemeksepeti.com with respect to abuse of dominant position, corresponding to the article 102 of TFEU. The main allegation of TCA in this framework was the exclusionary conduct of Yemeksepeti.com based on its wide MFC clauses in the agreements with the restaurants. Since the TCA s evaluation for the relevant market concluded as online food ordering service platform, Yemeksepeti.com s market share appeared as more than 80 percent 5 in most of the cities. Based on this relatively higher market share and arguing that the network effects in the market (without making any distinction, if its direct or indirect), TCA concluded that Yemeksepeti.com is a dominant undertaking in the relevant market. However, it is not exerted clearly how the wide MFC clauses exclude rival platforms. In the decision, TCA claimed that the application of wide MFC clause has exclusionary effects in the market through restricting the price and product diversification. The only evidence shown by TCA which support this claim was the failure of rival platforms to penetrate in the market. However, TCA had not interrogated if those rival platforms apply proper strategies for a two- 5 Authors estimation. In the decision, the market shares are hidden.

10 DIVERGING APPROACHES FOR MFC CLAUSES 10 sided market. In that sense, TCA eventually indicates an outcome rather than a process. To support its argument TCA condemned the application of wide MFC clause which avoids the rival platforms to attract famous fast-food restaurant chains. However, it is not discussed how the wide MFC clauses prevent to attract those fast-food chains. It seems that TCA has failed to identify the outcomes of wide MFC and network effects through the process; and it quickly came to the conclusion. However, in the decision it mentioned that it would adopt an effect based (rule of reason) approach for the evaluation of MFC clauses. In fact, the interaction between the wide MFC clauses and network effects should be analyzed in order to identify the exclusionary effects properly. In fact, there are two issues that have a potential to shed a light on such an interaction: critical mass and switching cost. In order to sustain its operation a platform has to reach a critical mass on both side of the market. That is the only way that it may benefit indirect network externalities between the two types of customers on each side of the market. However, this indicates a chicken- and-egg problem to provide efforts on get both sides on board (Rochet & Tirole, 2003). In online food ordering market, it indicates enough number of consumers and restaurants to create indirect network effects. A further step should be analyzed is the existence of any switching cost that avoid being a member of an entrant platform. In the absence of contractual or economical costs and/or exclusive contracts, members form each side can be multi-homed (Armstrong & Wright, 2007). However even with the existence of switching costs, entrant platforms must apply a certain business strategies to make profit in the market (Caillaud & Jullien, 2003). To quickly enjoy the benefit of indirect network effects, new entrants sacrifice their short term profits for their long term profits by applying penetration pricing strategies (Eisenmann, Parker, & Alstyne, 2006;

11 DIVERGING APPROACHES FOR MFC CLAUSES 11 Farrell & Klemperer, 2007; Katz & Shapiro, 1994). Those strategies consist of providing advantages for the customers at one or both sides of the market. In such a platform competition, charging lower or zero commission for the restaurants and/or subsidizing consumers are the typical strategies that can be applied for the penetration. At that point, the question appears as how the wide MFC clauses block such practices. Applying lower commission charges attracts restaurants on one side, and providing benefits to the consumers increased their numbers. Do the wide MFC clauses prevent rival platforms to apply those strategies? It seems that TCA only concentrate on the prices applied at the consumer side. However, there are plenty of penetration strategies other than price (Eisenmann et al., 2006). For instance, by applying lower commission rates entrants may attract restaurants to their platforms and on the other hand, by applying direct subsidies to the consumers may get both sides on board (Rochet & Tirole, 2003). Although wide MFC in practice avoids the appearance of different prices on rival platforms, plenty of business strategies might exhibit a success in the market. In fact, if TCA adopted an effect based (rule of reason) approach, at least some of the existing penetrating strategies of rival platforms had to be analyzed instead of such a categorical evaluation. In fact, such an analysis might partially eliminate uncertainty about TCA s approach for novel business models in the online world. Imposing fine despite the commitments As we mentioned at the introduction section, many of the relevant decisions in European countries are commitment decisions. Only the decision of Bundeskartellamt indicates an infringement, but no fine was imposed. TCA s Yemeksepeti.com decision has also created a divergence in that sense. Although the commitments of the company concerning the abolishing

12 DIVERGING APPROACHES FOR MFC CLAUSES 12 of wide MFC clause in its contracts with restaurants were welcomed, 428 thousand TRL (115 thousand EURO) fine was imposed. In fact, TCA has a tradition to accept commitments, preferably structural commitments, for mergers and acquisitions transactions. 6 However, for the infringement investigations TCA has not such a tradition. But, the Article 9/3 of the Competition Act, states that TCA may inform the undertaking concerning how to terminate the infringement. For instance, TCA took decisions based on the article 9/3 for the investigations concerning electricity distribution/retail companies during the liberalization and restructuring process of the electricity industry. 7 Although TCA has given several decisions based on the Article 9/3 in the sequel of pre-investigation process, there seems to be no legal impediment to give such a decision in the sequel of pre-investigation process. Accepting the commitment which abolishes the wide MFC clauses and imposing no fine might create a decision that would be aligned with the approaches of most of the European authorities, including the Commission. Furthermore, such a decision could partially eliminate the legal and business uncertainty for novel business models in the online world. In particular, MFC clauses in the online world have been a recent issue on which there has not been a settlement yet for their effects on competition and welfare. Most of the online start-up companies come on to 6 In its decision concerning the acquisition of Dosu Maya by Lesaffre, TCA even accepted behavioral remedies like committed price caps. TCA, Board Decision, numbered 14-52/ , dated Retrieved March 12, 2017, from pdf. 7 See, TCA, Board Decision, numbered 15-03/33-18, dated Retrieved March 12, 2017, from pdf.

13 DIVERGING APPROACHES FOR MFC CLAUSES 13 the market with novel business models and quickly become dominant in the markets which they create. However, expecting from those entrepreneurs to evaluate the lawfulness of their sophisticated business models -such as MFC- seems inequitable. Instead of imposing fines which may have a potential to create long term social opportunity cost through curbing incentives, corrective measures may play a productive role. Concluding remarks This paper evaluates the diverging approaches for MFC clauses considering the TCA s Yemeksepeti.com infringement decision. In respect to three aspects the paper criticizes the decision which diverge from the European authorities relevant decisions. First, the definition of relevant product market in the decision was not linked to the MFC clauses, which primarily aim to eliminate the substitutability between the transaction in different medium. Second, in its decision TCA has not empirically put the source of exclusionary effects. In other words, although TCA ruled that Yemeksepeti.com s conduct based on wide MFC clauses have exclusionary effects, it fails to distinguish the sources of exclusionary effects whether from MFC clauses or network effects. Third, unlike the relevant decisions by the European authorities, TCA did impose a monetary fine despite the commitments that abolishes the wide MFC clauses. The only settlement for the MFC clauses between the competition authorities or scholars is the necessity of adopting an effect base (rule of reason) approach while investigating the cases. Although TCA mentioned to be the part of this settlement, it has not adopted a proper effect base (rule of reason) approach. Especially in its analysis for the abuse of dominance, it indicates almost a categorical infringement concerning the wide MFC clauses. However, such a treatment has two effects on the creation of novel business models. First it may constitute a business uncertainty for the development of new business model and value

14 DIVERGING APPROACHES FOR MFC CLAUSES 14 creation. Second, the legal advisory in such a legal environment may be highly conservative towards new business models.

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