Towards a Layered Approach to Relevant Markets in Multi-Sided Transaction Platforms

• Date: 01 June 2020

TOWARDS A LAYERED APPROACH TO RELEVANT

MARKETS IN MULTI-SIDED TRANSACTION

PLATFORMS

C

AIO

M

ARIO

S. P

EREIRA

N

ETO

F

ILIPPO

L

ANCIERI

*

The rise of the digital economy spurred interest in the application of anti-

trust to so-called two-sided or multi-sided platforms—an area that has at-

tracted the attention of academics and policymakers.

1

Multi-sided platforms

challenge the traditional tools used in antitrust analysis, requiring the rethink-

ing of long-established doctrines and leading to much controversy on whether

there is need for the re-design of antitrust policy around the world.

2

Much of

the focus is on understanding how economic incentives change in markets

* Caio Pereira Neto is Professor of Law: FGV Direito SP, S˜ao Paulo. Partner at Pereira

Neto, Macedo Advogados. Member of the Brazilian Bar. Filippo Lancieri is a Fellow, The

George J. Stigler Center for the Study of the Economy and the State, the University of Chicago

Booth School. The authors would like to thank Peter Alexiadis, Dennis Carlton, Damien Ger-

adin, Alison Jones, Renato Nazzini, Randal Picker, Fiona Scott Morton, Lior Strahilevitz, Patrick

Todd, participants in the University of Tilburg Law and Economics Center (TILEC) seminar

series, participants of the 14th ASCOLA conference, as well as participants in a seminar held at

the King’s College London, for invaluable feedback and/or comments on earlier versions of this

article. We also thank the Antitrust Law Journal reviewers and editors for comments that helped

improve the article. All errors remain our own. Both authors acted as external counsel to compa-

nies operating in the electronic payments sector in Brazil, including Alelo, Bradesco, Cielo and

Elo, and Caio is still retained by these companies. This article, however, reflects solely our own

opinions and independent judgment and not that of any of the companies.

1

For a seminal paper, see William F. Baxter, Bank Interchange of Transactional Paper:

Legal and Economic Perspectives, 26 J.L. & E

CON

. 541 (1983), and, equally important, Jean-

Charles Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. E

CON

. 645

(2006) [hereinafter Rochet & Tirole, Two-Sided Markets]. For a literature review, see David S.

Evans & Richard Schmalensee, The Antitrust Analysis of Multisided Platform Businesses,in 1

T

HE

O

XFORD

H

ANDBOOK OF

I

NTERNATIONAL

A

NTITRUST

E

CONOMICS

404 (Roger D. Blair & D.

Daniel Sokol eds., 2014). For a more recent take, see OECD, R

ETHINKING

A

NTITRUST

T

OOLS

FOR

M

ULTI

-S

IDED

P

LATFORMS

(2018), www.oecd.org/daf/competition/Rethinking-antitrust-

tools-for-multi-sided-platforms-2018.pdf; Michael Katz & Jonathan Sallet, Multisided Platforms

and Antitrust Enforcement, 127 Y

ALE

L.J. 2142 (2018).

2

See OECD, supra note 1; Jonathan B. Baker, Jonathan Sallet & Fiona Scott Morton, Un-

locking Antitrust Enforcement, 127 Y

ALE

L.J. 1916 (2018) (a Yale Law Journal special edition

on antitrust enforcement).

429

430 A

NTITRUST

L

AW

J

OURNAL

[Vol. 83

with pervasive direct and indirect network externalities and more complex

pricing structures (including zero pricing markets) than traditional vertical

supplier-consumer industries.

3

This once theoretical debate quickly moved to real life. Germany amended

its antitrust laws to better address multi-sided markets.

4

Google now holds

record fines for antitrust violations after three consecutive convictions in the

European Union

5

—decisions in which much of the criticism focused on rele-

vant-market definition and proof of harm. In the United States, the Supreme

Court finally stepped into the debate with its decision in Ohio v. American

Express (Amex).

6

As presented in Part I, the heart of that controversial five-

to-four split vote

7

was the question of how to delineate relevant markets in

cases involving transaction platforms: while the majority affirmed that any

two-sided transaction platforms should always be considered a single relevant

market, the minority focused solely on payment services provided to one side

of the market (i.e., merchants). Given the importance of relevant market defi-

nition as an analytical tool in antitrust analysis, it is no surprise that these

opposite views led to different conclusions on whether American Express (or,

in the future, Google, Amazon, Apple, or any other company operating trans-

action platforms) had market power and whether parties proved an antitrust

infringement punishable by law.

Following an overview of the literature on multi-sided platforms (Part II),

this article challenges both the majority and the minority opinions in Amex. It

proposes a novel, multi-layered approach to relevant market definition that is

3

See, e.g., David S. Evans, The Antitrust Economics of Free, C

OMPETITION

P

OL

’

Y

I

NT

’

L

,

Spring 2011, at 71; Michal S. Gal & Daniel L. Rubinfeld, The Hidden Costs of Free Goods:

Implications for Antitrust Enforcement, 80 A

NTITRUST

L.J. 521 (2016).

4

Falk Schoening et al., Digital Is Trump!—Market Definition and New Dominance Criteria

for Digital Markets, H

OGAN

L

OVELLS

: F

OCUS ON

R

EGULATION

(June 22, 2017).www.hlregula

tion.com/2017/06/22/digital-is-trump-market-definition-and-new-dominance-criteria-for-digital-

markets/.

5

Press Release, Eur. Comm’n, Antitrust: Commission Fines Google C

=1.49 Billion for Abu-

sive Practices in Online Advertising (Mar. 20, 2019) (IP/19/1770) (linking to all three Google

fines). For a discussion of the second fine, see Randal Picker, Google Android Antitrust: Domi-

nance Pivots and a Business Model Clash in Brussels, CPI A

NTITRUST

C

HRON

., Dec. 2018, at 1.

6

Ohio v. Am. Express Co., 138 S. Ct. 2274 (2018) (Amex).

7

Indeed, the case not only split the U.S. Supreme Court but much of American antitrust

academia, as shown by the number of amicus briefs filed by professors, such as Herbert

Hovenkamp, Harry First, Einer Elhauge, Eleanor Fox et al.; David Evans and Richard Schmalen-

see, and Richard Epstein and Joshua Wright offered divergent views on how the Court should

decide the case. See Brief of 28 Professors of Antitrust Law as Amici Curiae Supporting Petition-

ers, Amex, 138 S. Ct. 2274 (No. 16-1454) (Dec. 14, 2017) (including Professors Hovenkamp,

First, Elhauge, and Fox, among others); Brief for Amici Curiae Prof. David S. Evans and Prof.

Richard Schmalensee in Support of Respondents, Amex, 138 S. Ct. 2274 (No. 16-1454) (Jan. 23,

2018); Brief for Amici Curiae Antitrust Law & Economics Scholars in Support of Respondents,

Amex, 138 S. Ct. 2274 (No. 16-1454) (Jan. 23, 2018) (including Professors James C. Cooper,

Richard Epstein, Tad Lipsky, David Teece, and Joshua Wright).

2020] M

ULTI

-S

IDED

T

RANSACTION

P

LATFORMS

431

better aligned with the established view that antitrust analysis should focus on

the competitive constraints faced by firms (Part III). In particular, using the

electronic payments market as a reference, it demonstrates how multiple rele-

vant markets may co-exist within a single transaction platform—depending on

the focus of the analysis and the strength of network effects. In doing so, it

challenges the Amex majority’s opinion (which reflects part of the literature)

that transaction platforms always lead to the definition of a single relevant

market encompassing both sides of the platform. On the contrary, in some

transaction platforms, where firms are not particularly constrained by indirect

network externalities, some players indeed operate as if in one-sided markets.

This, however, does not mean that the minority opinion is correct. The dis-

sent led by Justice Breyer ignores that some players (normally the platforms

owners) are focused on balancing the overall platform and should not be re-

quired to consider in isolation the impacts of their conduct on a single side of

the network. Our view may be considered a bridge between the two most

important strains in the literature on the topic, the one defending the preva-

lence of one multi-sided market

8

and the other that favors multiple, one-sided

markets.

9

This view is particularly important to instruct antitrust scholars and

lower courts on when cases warrant a multi-sided analysis—meaning that

Amex is the applicable precedent—and when they should look for alternative

frameworks.

In other words, this article proposes a pragmatic approach to relevant mar-

ket definition that is based on two opposite findings. On one hand, as well

recognized, economic constraints on transaction platforms come not only

from substitutability of products/services traditionally considered in relevant

market definition, but also from direct and indirect network effects that may

limit competitive strategies adopted in either side of the platform—a process

that pushes towards defining a single multi-sided relevant market. On the

other hand, as less acknowledged, these very same platforms may be struc-

tured in ways that limit a firm’s (or a set of firms’) exposure to these network

effects, so that they are insufficient to limit the firm’s ability to raise prices on

a single-side of the platform without passing the price derived from users on

one side of the platform to users on the other side of the platform—justifying

an analysis focused solely on this impacted side.

By focusing the analysis on a firm’s ability to profitably raise prices on one

side of the platform without being materially constrained by the other side,

this article argues that a single transaction platform may be better interpreted

8

See, e.g., David S. Evans & Michael Noel, Defining Antitrust Markets When Firms Operate

Two-Sided Platforms, 2005 C

OLUM

. B

US

. L. R

EV

. 667; Lapo Filistrucchi et al., Market Definition

in Two-Sided Markets: Theory and Practice, 10 J. C

OMPETITION

L. & E

CON

. 293 (2014).

9

See, e.g., Dennis W. Carlton & Ralph A. Winter, Vertical Most-Favored-Nation Restraints

and Credit Card No-Surcharge Rules, 61 J.L. & E

CON

. 215 (2018); Katz & Sallet, supra note 1.