Recognising that e-commerce is a critical part of the internationalisation strategy for Singapore businesses, the Competition Commission of Singapore ("CCS") commissioned two market studies in 2015 and 2017 into the effects of e-commerce and its implications on competition law and policy in Singapore and the ASEAN region respectively.
Of particular interest for this article is the second study which culminated in the publication of the Handbook on E-Commerce and Competition in ASEAN (the "Handbook") in August 2017.
This article will briefly touch on the key findings of this second study, in particular the following:
a) the nature of e-commerce platforms; and
b) a sample of competition issues that may be a feature in such e-commerce platforms,
before ending with some observations on possible steps that e-commerce businesses may take to ensure compliance with competition law in Singapore and the ASEAN region.
Nature of e-commerce platforms
E-commerce broadly refers to the sale and purchase of goods and services through electronic networks and the internet.
The rise of new multi-sided online marketplaces in e-commerce has led to increased interest by competition authorities in the ways in which such platforms operate and whether traditional tools used by competition authorities to assess the competitiveness of such markets can continue to be applied:
"existing approaches to define the relevant market(s) may no longer apply due to the interrelationships and externalities between distinct sides of the market which affect the way in which firms set prices. If the value from using a platform increases on one side as a result of more users on the other side, a platform may set price below cost on one side of the market to attract users on the other side. The traditional tests used by competition authorities for defining a market are therefore typically not applicable."
As a matter of competition policy, when assessing the market power of a firm, ASEAN competition authorities will therefore consider the nature of competition within that market, especially the relationships between all sides of the market. In this regard, Schumpeterian competition, which describes business cycles and economic change resulting from innovation, tends to characterise e-commerce markets. Market leaders find it difficult to maintain their dominance for long periods of time given the constant and rapid innovation of competitors. Static market shares are therefore not determinative of a firm's market power and an examination of the dynamic competition posed by potential new entrants is necessary.
Competition Issues raised by e-commerce platforms
In examining barriers to entry in e-commerce, the following four broad categories of barriers to entry vis-à-vis e-commerce platforms were identified in the Handbook:
a) Economic advantages enjoyed by incumbents: These advantages come in the form of economies of scale and scope, and privileged access to essential inputs, technologies or information.
Economies of scale and scope may be less of an entry barrier for e-commerce businesses due to the significantly lower fixed costs of entering the market via the internet. However, incumbents continue to enjoy an advantage over smaller/newer online retailers given their ability to spread marketing costs over their larger inventory.
As regards privileged access to essential inputs, the access to large customer-related datasets as an entry barrier is currently debated. The Handbook observes that "[o]wning large datasets does not necessarily lead to market power, or act as a barrier to entry per se, especially in E-commerce markets where competition is dynamic". That said, if such datasets are not easily replicated but are necessary for potential entrants to operate in the market, they may constitute an essential facility.
b) Costs and network effects that inhibit consumers from switching suppliers: Switching costs for consumers may pose a challenge to new entrants as they make the purchase of an equivalent product/service more expensive for a consumer. Such costs may include the time spent creating a new account, the forgoing of any loyalty rewards with existing e-commerce platforms/merchants, and running the risks of online fraud or, more commonly, unsatisfactory product quality or non-conformity between the product description and the actual product. While similar issues may arise vis-à-vis brick-and-mortar businesses, these issues tend to be exacerbated in the e-commerce setting due to the reduced ability of consumers to determine the reliability and quality of the e-commerce businesses' product/service offerings.
Apart from switching costs, network effects are also present in multi-sided platforms; in such platforms, the value that a user derives from the platform is commensurate with the number of users on the same platform. To illustrate, in the case of price comparison websites (like Agoda) or marketplace-type platforms (like Amazon or Zalora), a customer derives more benefit and utility if more suppliers are present on the same platform given the increased variety from which the customer may compare and select from. Equally, a supplier derives more benefit from listing its products/services on the platform if there are more customers to which its listings will be exposed to. Notwithstanding this, if consumers have a habit of multi-homing, network effects become less of an entry barrier.
c) Legal barriers: These comprise, for example, regulatory rules limiting the number of market participants, tariffs, government licensing requirements, and intellectual property ownership by incumbents. Compliance costs may also be a high entry barrier for new entrants.
d) Conduct of incumbent firms: The ability of new businesses to enter, or compete effectively in, the market may be hindered by the conduct of large incumbent firms exercising their market power. This is elaborated upon below.
The study also looked at possible competition concerns arising from the use of vertical restraints to limit the market conduct of trading partners to the detriment of competition between entities. In Singapore, where such vertical restraints are introduced between two or more firms in a vertical relationship, such restraints are generally excluded under the Third Schedule to the Competition Act (Cap. 50B) from the prohibition against cartel behaviour (i.e., the section 34 prohibition under the same Act) on the basis that they generate efficiencies. However, such vertical restraints may give rise to anti-competitive effects and may potentially be caught:
a) under section 34 of the Competition Act where they are introduced between two or more firms in a horizontal relationship or where they facilitate horizontal collusion; or
b) under section 47 of the Competition Act (which prohibits the abuse of a dominant position) where they are used by a firm to maintain or reinforce its dominant market position through exclusionary conduct.
The controversy surrounding retail Most Favoured Nation ("RMFN") clauses is illustrative.
RMFN clauses are often imposed between upstream suppliers and downstream e-commerce platforms. Such clauses require the supplier to not price its goods at a retail price below that offered to that particular e-commerce platform ("Platform A"). Depending on the width of the RMFN clause in question, other competing platforms selling the same supplier's products may also be prevented from retailing the products at a more commercially attractive price by virtue of the RMFN clause entered into between Platform A and the supplier; this occurs where the RMFN clause requires the supplier to ensure that no other platform may price the supplier's products below Platform A.
While there may be good reasons for such RMFN clauses (e.g. to prevent other platforms from free-riding on the investment by Platform A in marketing the product and the customer reviews of the products on Platform A), these clauses may also:
a) facilitate collusion by reducing price variation across the different platforms, enabling competitors to monitor each other's prices easily;
b) foreclose the market by preventing new entrants from pricing below the incumbents, making it untenable for new entrants to compete effectively; and
c) soften competition by reducing the incentives for platforms to optimise their price structure to attract both suppliers and customers.
Another example of potential competition concerns arising from vertical restraints in e-commerce distribution systems is that of exclusive purchase restrictions. Traditionally, exclusive purchase restrictions assist a supplier in preventing free-riding by rival suppliers. However, they also remove inter-brand competition between the suppliers. The varying approaches towards exclusive purchase restrictions are demonstrated by two cases that the CCS has handled:
a) In the first case of SISTIC.com, exclusivity agreements imposed by SISTIC.com, an online ticketing services provider, on venue providers were found to be an abuse of dominance by SISTIC.com as they foreclosed the market to rival ticketing services providers.
b) Contrasting against this is the practice of online food delivery services entering into exclusivity arrangements with restaurants, preventing the latter from using the food delivery services of competing service providers. In relation to this, the CCS found that the exclusivity agreements had not harmed competition and the online food delivery industry remained competitive. The CCS, however, stated that it will continue to monitor the market and market conduct.
In the cases cited above, the nature of competition within the market in question and features of the market which respond to the use of vertical restraints must be examined. This necessitates a case-by-case approach in assessing the use of such vertical restraints and the corresponding impact on competition in respect of the market(s) in question.
Besides vertical restraints, technological advancements have also enabled firms to rely on price monitoring tools and price setting algorithms to automatically adjust their prices to adapt to their competitors' price movements. In this regard, concerns that such tools may facilitate cartels by making it easier to detect deviations from agreed prices and implementing agreements to fix prices have been raised.
What e-commerce businesses can do
To mitigate any risks posed by inadvertent breaches of competition law, the Handbook identifies the following three core areas of anti-competitive conduct that e-commerce businesses should be mindful of:
a) Coordination with competitors;
b) Anti-competitive agreements; and
c) Individual anti-competitive conduct.
As a first step, a review of the business' activities should be undertaken to identify risks of breaching competition law. This may be done by examining, for instance:
a) the conduct of employees (e.g. whether they have contact with competitors);
b) the use of any automatic algorithms by the business to set prices or monitor competitors' prices;
c) the business' practices (e.g. whether the business signs up with online platforms that are commonly used by its competitors and whether the platform imposes any RMFNs, whether the business enters into exclusive contracts for extended periods or imposes other restrictions on its downstream merchants or upstream suppliers); and
d) the business' market shares and market power.
Second, having identified the risks, the business would need to assess the likelihood of these risks materialising.
Third, the business would need to take action to reduce such risks. This may be done by implementing certain compliance procedures (e.g. creating logs of all correspondence with competitors or attendance at events where competitors are likely to be present, having a confidential whistleblowing procedure) and conducting competition law trainings to educate employees on the risks that the organisation faces and the steps that they can take to reduce such risks in their own capacity. If, based on the business' self-assessment, the likelihood of such risks materialising is fairly high due to, perhaps, the business' market power, advice of competition counsel may assist the business in determining its steps to mitigate such risks.
Finally, the business should periodically review its processes and keep abreast of competition developments to ensure the continued relevance of its compliance efforts.
The digital economy will lead to exciting new possibilities but may also expose e-commerce businesses to hitherto unknown competition risks. Given the increasing scrutiny posed by competition authorities over e-commerce businesses, and the possibility of liability being imposed in multiple jurisdictions for any inadvertent contraventions due to the borderless nature of the internet, e-commerce businesses would therefore do well to maintain a high level of vigilance in their compliance with competition laws and policies in the jurisdictions that they are active in.
- Handbook on E-Commerce and Competition in ASEAN (Singapore: Competition Commission of Singapore, 2017).
- Justina Sim, Lip Hang Poh and Calvin Tay, “Do Retail MFN Clauses Lead to Softening of Competition?”  Asian Journal of Law and Economics, vol 7(1), 101-145.
- Justina Sim and Tan Hi Lin, “Anything wrong with asking for the best price?” CCS Occasional Paper Series (17 August 2015) (link: https://www.ccs.gov.sg/~/media/custom/ccs/files/media%20and%20publications/publications/occasional%20paper/ccsoccasional%20paper%20%20mfn%2017%20august%20final.ashx).
- Media release, “CCS investigation finds online food delivery industry to be currently competitive but exclusive agreements could be problematic in future” (25 August 2016) (link: https://www.ccs.gov.sg/media-and-publications/media-releases/investigation-of-online-food-delivery-industry).
- Abuse of dominant position by SISTIC.com Pte Ltd (CCS/600/008/07) (4 June 2010).