INSIGHT

How will the food & groceries market adjust to the rise of digital platforms?

Food & Beverage Technology

In brief 7 min read

Digital platforms, such as Amazon, have the potential to transform the food and grocery industry. The amended misuse of market power provision aims to protect smaller competitors without stifling innovation. Does the new law have any role to play in the ascent of digital platforms?

Background

Digital platforms facilitate interactions between user groups, including suppliers, retailers and consumers. In the food and grocery industry, digital platforms may provide new ways for consumers to source their weekly shop, including by bypassing the traditional supply chain and directly dealing with suppliers.

Amazon officially arrived in Australia in December 2017, and local retailers braced for tough competition from the tech giant. The ACCC has stated publicly that it considers Amazon’s entry into Australia will be good for consumers, and has made clear that the amended misuse of market power provision is not designed to protect competitors from competition. However, while Amazon now is currently a new entrant into Australia, it could gain market power over time, and it may well come under ACCC scrutiny.

More generally, digital platforms are facing intense regulatory scrutiny. There are growing concerns that certain digital platforms may possess market power and that they have the potential to foreclose smaller rivals. Competition authorities around the world are investigating the practices of digital platforms, including the mass collection and use of data, the tying and bundling of other services, and the preferential treatment given to their own services.

The ACCC is currently conducting an inquiry into the effect of digital platforms on the production of news and journalism in Australia, while the European Commission recently published a range of proposals to regulate online platforms and search engines. The US Federal Trade Commission will shortly conduct public hearings to consider whether adjustments to competition and consumer protection laws are required to address changes in the economy brought about by new technologies, including algorithmic decisions and big data.

Recent reforms to competition law arising from the Harper Review have also broadened the range of conduct that may be prohibited. The question is how the ACCC will seek to target anti-competitive conduct without stifling innovation or digital disruption.

New misuse of market provision

One of the boldest reforms arising from the Harper Review was the amendment to the prohibition on misuse of market power. The Competition and Consumer Act 2010 (Cth) now prohibits any conduct engaged in by a firm of substantial market power that has the purpose, effect or likely effect of substantially lessening competition in a market in which the firm directly or indirectly supplies or acquires goods or services.

The new prohibition has the potential to capture a far broader range of conduct than the previous prohibition. Previously, the law prohibited firms from taking advantage of their market power for one of three proscribed purposes. The amendments have lowered the threshold for establishing a misuse of market power by removing the ‘taking advantage of’ element, which required a causal connection between the conduct and the firm’s market power, and introducing an ‘effects’ based test to assess the firm’s conduct.

Do platforms have ‘super-Market’ power?

‘Market power’ is the ability to behave unconstrained in a market for a sustained period. In determining whether digital platforms have market power, regulators will consider the level of concentration in the market, barriers to entry and expansion, and the degree of vertical integration.

Digital platforms have certain characteristics that make a traditional misuse of market power analysis more difficult.

First, digital platforms often offer services to consumers for ‘free’ in return for the right to collect user data. They use this data to refine their services, develop new services, and offer other services for remuneration, such as targeted advertising opportunities. This makes digital platforms enormously popular; however, popularity does not necessarily mean market power. The digital marketplace is riddled with stories of rapid expansion and freefall – remember MySpace, Napster and Netscape?

Second, a distinctive characteristic of data is that it is non-rivalrous. This means that the collection of data by digital platforms does not prevent others from collecting or using the same data. Nevertheless, there is growing recognition that the scale of data collection by some digital platforms, coupled with consumers’ tendency to remain loyal to certain platforms means that the possession of a huge dataset may represent a barrier to entry.

Third, the digital marketplace features ‘network effects’ that tend towards a winner-takes-all scenario. ‘Network effects’ means that the value of a service to its users increases as the number of other users increases. More traffic to a digital platform also helps it to improve quality, as there is more data to collate and analyse. The high level of quality in turn drives more traffic to the platform. This gives the leading platforms a competitive advantage over emerging platforms, which compounds as the platform becomes more entrenched.

What are the regulators doing?

Despite the challenges of applying a traditional market power analysis, competition regulators around the world are considering the impact of digital platforms on the competitive process and have launched investigations into potential misuse of market power concerns:

  • In 2015, the European Commission investigated Amazon’s business practices – in particular, its use of most favoured nation clauses (MFN clauses) as part of its e-book business. The MFN clauses required publishers to ensure that no competitor of Amazon could receive better terms relating to price, commission and e-book catalogues. In some circumstances, the clauses also required a publisher to inform Amazon about more favourable terms that were offered to Amazon’s competitors. The European Commission expressed concerns that MFN clauses may breach European anti-trust rules and that such clauses made it more difficult for other e-book retailers to compete with Amazon. In 2017, the European Commission accepted commitments from Amazon to address these concerns; in particular, these commitments required Amazon to not enforce, include or change certain MFN clauses, and to allow publishers to terminate e-book contracts that contained certain MFN clauses.
  • The German Federal Cartel Office launched an investigation into Facebook’s privacy policy. A preliminary view released in December 2017 found that Facebook had abused its dominant position by making the use of its social network conditional on it being allowed to amass data gathered from third party apps and websites, and merged this with users’ profile data. The preliminary assessment concludes that Facebook has implemented terms of
    service that are deceptive or otherwise in violation of European data-protection laws, and that this practice enabled it to build and maintain a dominant position in the market for social media services.
  • The US Federal Trade Commission, which serves as the consumer watchdog over privacy issues, announced in March 2018 that it is conducting a non-public investigation into Facebook regarding privacy and data-security requirements.

In addition to enforcement action, regulators are conducting various inquiries, research projects and public hearings to determine the right regulatory response to digital disruption.

Is there cause for concern?

Even if digital platforms come to hold a substantial degree of market power in the food and grocery market, there is still a question as to whether their conduct would have the purpose, effect or likely effect of substantially lessening competition. 

The ACCC has, to date, signalled a cautious approach to the practices of digital platforms. The Chairman of the ACCC, Rod Sims, has shown a positive attitude towards the arrival of Amazon, noting that the suppliers would have a new route to market, which will bring about lower prices to consumers, and likely trigger a competitive response from the big retailers.

In fact, the ACCC has indicated that in responding to the disruption of the market caused by digital platforms, powerful retailers and suppliers should be careful not to engage in a misuse of market power themselves. For instance, selective discounting to match a digital platform’s offering could raise concerns where it is below cost or intended to prevent a digital platform from establishing itself in the market.

That is not to say that the ACCC will not consider the potential harm of digital platforms as they gain market share. As noted above, the ACCC is currently reviewing the impact of digital platforms on the production of news and journalism, and it is expected that the outcome of this inquiry will have a broader impact on the practices of digital platforms in other markets. Developing the right regulatory response to the ascent of digital platforms is likely to be a hot topic for the ACCC for the foreseeable future.