May 27, 2022

Should Platforms Be Banned from Selling in Their Own Markets?

By Liad Wagman

TL;DR:

  • A number of policies have been proposed or enacted to ban platforms from selling in their own marketplaces. 
  • These policies are driven by two primary concerns: (i) prioritizing and making more prominent the platform’s own offerings, and (ii) utilizing third-party sellers’ data for competitive gain.
  • However, policies that propose outright bans disregard the numerous economic benefits of seller-operated marketplaces. 
  • Overall, such bans can harm consumers by giving more weight to alleged concerns than to economic benefits that have been consistently demonstrated through low prices and better service. 
  • There are other approaches to addressing the concerns without bans.

Regulators around the world are increasingly proposing and enacting new antitrust laws that seek to ban large platforms from operating as both a marketplace and a seller in that marketplace. Such regulations would affect a number of leading technology companies. In such cases, the platforms’ own offerings may compete with those from third-party sellers. Examples are numerous and include Amazon, Walmart, and Target, as well as Alphabet (in the Google Play Store), Apple (in the Apple App Store), Intuit (QuickBooks Apps), Microsoft (Windows Apps), and Salesforce (App Exchange). Each of these firms operates a digital marketplace and also acts as a seller or a reseller of products and services in the same marketplace. 

These policy actions are driven by two primary concerns:

  • The platform can engage in self preferencing, i.e., it may prioritize or make more prominent to buyers its own products and services.
  • The platform can obtain proprietary information on third-party sellers’ products (including the prices and quantities in each transaction, demand trends, users’ search behavior, product returns, etc), and may use that information to benefit its own potentially competing business lines or to launch new ones.

In late 2018, India published a circular that effectively banned Amazon and Flipkart from selling products (on their respective marketplaces) of companies in which they have an equity stake, effectively forbidding the platforms from concurrently being a marketplace and a seller in that marketplace. New proposed antitrust laws in the U.S. have similar objectives. For example, the Ending Platform Monopolies Act, which seems surgically targeted at GAFAM firms (Google/Alphabet, Apple, Facebook/Meta, Amazon, and Microsoft), would make it unlawful for such larger platforms to own or operate a business that presents a clear “conflict of interest” (when the “covered platform’s ownership or control of that line of business creates the incentive and ability for the covered platform to advantage the covered platform operator’s own products, services, or lines of business on the covered platform over those of a competing business…”). In other words, the Act is aimed at stopping GAFAM from operating as both a marketplace and as a seller in that marketplace, given that they may face a conflict of interest in selling their own competing offerings in competition with third-parties on their respective marketplaces. Another related policy proposal, the American Choice and Innovation Online Act, would similarly ban activities that may involve self-preferencing by GAFAM. 

The proposed legislation described above (aside from being tailored to target specific firms) ignores the potential efficiencies that seller-operated marketplaces introduce and takes a rather crude approach to address the two concerns. In contrast, these concerns could be more simply resolved through existing competition frameworks (which apply industry wide) or with regulations, not targeted at specific firms, aimed directly at restricting self-preferencing and the sharing of third-party seller competitive data across divisions that face a conflict of interest. (The latter approach has recently gained ground in the EU.)

The efficiencies that seller-operated marketplaces introduce are rooted in economies of scale and scope from offering third-party sellers’ and the platform’s own products and services in a single marketplace, which enable a number of economic advantages. These economic advantages, in turn, can mean better prices and customer service for buyers, and include:

  • It is less costly to run a single marketplace. 
  • The shipping and handling of purchases with multiple items is less costly.
  • Some types of products and services may be more efficiently provided by the marketplace operator (i.e., by the platform), while others may be more efficiently provided by third-party sellers. A single seller-operated marketplace provides a market-driven approach to sort out these efficiencies. 
  • Buyers are able to buy complementary products in the same purchase – products that would otherwise be offered by sellers in different marketplaces.
  • Buyer tastes can be more readily discerned, which facilitates more relevant product recommendations and search results.
  • A single marketplace offers one-stop shopping convenience to buyers (no need for multiple accounts and multiple potential points of data exposure).
  • A seller-operated marketplace offers enhanced supply-chain management, mitigating some potential issues with high-demand items being out of stock.

There are also benefits from increased competition in a seller-operated marketplace:

  • There is more competition among sellers, including from the platform itself, over each product category. Moreover, by competing itself, the platform can offer buyers more choice and better pricing, particularly in product categories where there are dominant incumbents. 
  • There is more competition among sellers, including potentially the platform, over non-price dimensions, such as shipping, customer service and return policies, including the cost (or lack thereof) of return shipping.

These benefits have been recently published in academic work and regularly manifest in the form of lower prices and better service. It is also important to note that since the platform that operates its marketplace has a significant profit motive to keep buyers returning, it is unlikely to adopt policies that harm the buyer experience, and may even take steps to enhance overall buyer demand for the marketplace, to the benefit of all sellers on the platform. It is thus unclear that the two concerns of policymakers – namely, self-preferencing and accessing third-party competitive data – pertain to actual harms, since platforms are unlikely to adopt policies that harm the likelihood of their buyers returning. 

Therefore, the benefits of allowing a platform to participate as a seller in its own marketplace are clear and numerous, while the concerns are concentrated in two isolated types of hypothetical behaviors. Those behaviors, however, can be directly addressed through existing competition frameworks. It thus makes little sense to deny consumers the numerous economic benefits of seller-operated marketplaces in order to address two hypothetical harms to sellers on the platform – especially when those alleged harms can be addressed with other means. 

Liad Wagman is Data Catalyst Institute Competition Fellow and James B. Finkl Professor of Economics, Stuart School of Business, Illinois Institute of Technology. Wagman does not consult for nor hold stock in any of the referenced companies. 

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