Market Definition and the Sharing Economy

By Carmen Ortiz*

Introduction

Technology enabled the flourishing of the sharing economy both in developed and in developing countries.[i] It is characterized as an innovative system of collaboration between peers through an online platform accessed through smartphones.[ii] Services, goods, spaces, and others that are in surplus are offered for lease or sale at reduced transaction costs. Thus, the sharing economy boosts competition while generating different effects for the groups affected. For one part, consumers benefit with the access to new products and services, lower prices and non price benefits. For the other part, traditional firms face new threats by suppliers that compete aggressively to reduce the revenues and the market shares of incumbents. This novel model of commerce motivates for an analysis that determines the extent to which competition authorities in developed and developing countries should include the sharing economy activities in the relevant markets (RM) for traditional products and services.

The inclusion or exclusion of sharing economy activities could widen or narrow traditional RM and this can produce several consequences that influence the efforts of competition authorities in their aim to protect competition. First, the analysis of market power may be influenced by identifying more or less competitive constraints in the commercial behaviour of an undertaking. Second, regarding merger control, if sharing economy firms participate in the same RM of traditional firms, mergers between them would be analysed as horizontal (for example, where traditional firms could acquire sharing economy start ups to eliminate competitors). Third, referring to abuses of dominance, traditional firms could independently or collectively exclude sharing economy suppliers by raising barriers to entry. Moreover, a cartel between traditional firms might be obstructed if sharing economy competitors are successful disruptors of collusion. For all these reasons it is important to set a framework for definition of RM that can adapt to cases where this model of commerce is present.

New and expanding competitive constraints by sharing economy suppliers can change the current structure of traditional markets. Real world cases of this model of commerce are Uber and Airbnb, which exert competitive pressures on traditional rivals. For example, Uber fares in Stockholm can be up to 60% lower than traditional taxi fares.[iii] Non price benefits for consumers include less congestion, less delays and less time lost in traffic, all of which increase the demand for the service. Regarding Airbnb, in Texas, its growth of by 10% results in decreases of 0.37% in monthly hotel revenues.[iv] In the period of 2010 to 2015 the occupancy rates of traditional hotels have decreased from 8-10% in the areas where Airbnb has more demand.[v] These firms will serve as examples for the development of this proposal.

Framework for defining RM when the sharing economy is present

For the purpose of suggesting a framework for the definition of RM, the EU antitrust jurisdiction will be taken as a base as it is a leading regime that can be taken as a guide or as a point of comparison for other jurisdictions. The first step in this framework is to embrace the objective and the concept of RM. In the EU, the objective of defining the markets is to establish which undertakings constrain others from behaving freely in absence of competition.[vi] The basic concept of RM encompasses a product and a geographic dimension, and these will remain as the building blocks of this proposal.[vii]

Second, the undertakings that could supply the products or services that form part of the RM must be defined.[viii] In this stage, the focus is directed to the economic activity of the entities.[ix] In the special case of the sharing economy, two economic activities must be distinguished: a) online platform’s intermediation of supply and demand and, b) the supply of products and services. The specific characteristics of the relationship between the owner of the platform for intermediation and the suppliers of the services are decisive to determine whether they together form a single undertaking or independent undertakings. Lougher and Kalmanowicz sustain that if the firm providing intermediation also influences the conditions of the offer it could be determined that there is a single undertaking performing both activities. This posture is also accepted outside the EU, for example, in Australia.[x] For example, Uber sets requirements for the driver, the car and for the mode of operation. According to Lougher and Kalmanowicz, the exam must consider the contractual conditions, whether or not the suppliers are independent from the platform, if they bear risks, if they are employees or agents, among others.

Third, once the firms have been identified, the competitive constraints that they encounter should be established. Firms can face constraints as demand substitutability, supply substitutability and potential competition.[xi] Special considerations for each of these constraints are required in the markets where the sharing economy is present. On one hand, demand substitutability significantly determines market definition. The whole purpose of market definition is to determine which are the substitute products or suppliers to which customers can switch. Demand substitutability may refer to the prices, characteristics and the intended use of the products. For the EU Commission, the decisive criteria is the consumer’s reaction to prices as it considers that product characteristics and intended use are insufficient to reveal demand substitutability.[xii] Nonetheless, consumers of the sharing economy have revealed that they prefer it for its convenience.[xiii] Therefore, this framework suggests that the analysis should be flexible enough to take into account the consumer’s reaction to prices and also the product’s characteristics and intended use as they are motifs of convenience. The evidence of marginal consumers switching for reasons as price or convenience to the sharing economy products and services and making the price increase in traditional products unprofitable allows the inclusion of those products and services into the traditional RM.

For example, to test consumers’ reactions to prices the EU Commission’s Notice refers to a hypothetical monopolist and whether its “customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5 % to 10 %) but permanent relative price increase in the products and areas being considered”.[xiv] In the case of Uber, the test will reveal if the referred increase in prices of traditional taxi services would be unprofitable because Uber exerts sufficient competitive constraints that enable customers to switch to it. If yes, Uber should be included in the product market. For defining the geographic market, the question is to which other areas of Uber service would costumers switch “in the short term and at negligible cost” in reaction to the referred fare increase.[xv] Those areas that are alternatives for consumers should be included in the relevant geographic market. In synthesis, this is the extent to which Uber services could be included in the RM of traditional taxi services. It is interesting to note that it has been argued that because the sharing platforms are not direct substitutes of traditional products and services and because they cannot fulfill the demand, they should not be considered competitors (see Oxera Compelling Economics article). This proposal disagrees with such point of view. The reason is that the inclusion of a product in a relevant market relies on whether that product exerts sufficient competitive constraints in the other products to the point that their price increases are not profitable, not whether that product is able to fulfill the total demand or whether it is exactly the same in terms of characteristics.

Evidence in support of the inclusion of the sharing economy in the traditional market definitions could include the substitution on the recent past,[xvi] empirical data of quantities demanded and its impact on the traditional offer, good brand reputation that attracts the preference and loyalty of consumers,[xvii] convenience (accessibility, trust), the legal treatment by authorities of the product forming part of the traditional supply,[xviii] among others.

Regarding Airbnb, a similar methodology applies. Unprofitability after the mentioned price increase in hotel rooms in a given area will reveal if Airbnb exerts sufficient competitive pressures that allow its inclusion in the traditional RM of accommodation services. Past substitution, comparisons of the room capacity of hotels versus the growing supply of Airbnb,[xix] the impact of Airbnb on hotel’s revenues, uniqueness of Airbnb service, consumer’s preferences, could all constitute evidence that supports demand substitutability.[xx]

Once it has been established that the sharing economy activities exert sufficient competitive pressures to make unprofitable the price increases of traditional services, it must be ascertained which specific activities will be included in the definition of RM. The activities could be the intermediation platform and the supply, which could be considered independently or jointly in the exam of substitutability. It will all depend on the closeness and interdependence between those activities. If they are independent from each other, only be the products or services that exert competitive pressures on traditional products or services will be tested. If they are close enough to constitute one single activity, the intermediation and its underlying supply should be tested as a whole.[xxi] Even when it has been acknowledge that the “sharing economy platforms are generally active on the relevant product market for the intermediation of the relevant underlying supply”,[xxii] this is a situation that must be determined case by case.

On the other hand, regarding supply substitution and potential competition, the sharing economy involves a significant and constant competitive threat. In the scenario of the sharing economy, consumers with surplus of space, products and time, can easily become suppliers of more than one product or service depending on the surplus they possess over them and this way they can compete with traditional firms.[xxiii] This could happen in response to small and permanent changes in relative prices of traditional products and services which represent potential sources of income for new suppliers.[xxiv] The presence of sharing economy suppliers that compete for the customers of the traditional firms is an element that supports the inclusion of that specific sharing economy in the traditional RM.

Finally, regarding barriers to entry, these could take the form of legal, cultural, social and economic barriers that could weaken or obstruct the pressure exerted by the sharing economy on traditional businesses.[xxv] Legal barriers were raised with the French Constitutional Court banning Uber services (See article by Reuters). Moreover, Uber has closed operations in Frankfurt, Hamburg and Düsseldorf in response to a Court ban (See article by Lomas, N). Cultural barriers might arise when local custom, traditions and values are not relaxed enough as to allow its members to interact with strangers that offer services through the sharing economy. Social barriers might be the political instability, insecurity and violence in the society that could demotivate consumers from being exposed to the risks associated with the offer of the sharing economy (for example, unpredictability of trusting a stranger). Economic barriers could referr to the lack of resources to fund publicity and marketing for a sharing economy product or service. All of the mentioned barriers must be considered for the definition of relevant markets as they prevent consumers from switching their demand towards sharing economy substitutes.

Conclusion

Technology, consumer preference, strong brand reputation and the possibility of an ever growing supply provide the sharing economy with a high potential of growth within many sectors of the economy. The assessment of its inclusion on traditional RMs is essential for the protection of competition and innovation in developed and in developing countries. The assessment must be case and context specific as every industry has different structure and conditions. Moreover, barriers to entry specific to each national context might prevent the sharing economy from being a competitive constraint. For these reasons, there cannot be a one size fits all answer to whether the sharing economy activities should be included or not into the traditional relevant markets. In some cases, some analysis will result positive for its inclusion while in others, negative.

*LLM in International Competition Law and Policy, University of Glasgow, School of Law, Scotland, United Kingdom. Candidate for the LLM in Law and Economics, University of Utrecht, Netherlands. Head of the Mergers Control Unit in Superintendencia de Competencia, El Salvador, from January 2012 to August 2015.

Bibliography

Reports and Market Studies

Australian Competition and Consumer Commission, “The sharing economy and the Competition and Consumer Act”, 2015, available at: “https://www.accc.gov.au/system/files/Sharing%20Economy%20-%20Deloitte%20Report%20-%202015.pdf

Stefansdotter, A., Utfall Danielsson, C., Kastberg Nielsen, C., Rytter Sunesen, E. (2015) “Economic benefits of peer- to-peer transport services”, Copenhagen Economics, Stockholm. Available at: https://www.google.nl/search?client=safari&rls=en&q=Copenhagen+Economics+(2015),+%E2%80%98Economic+benefits+of+peer-to-peer+transport+services%E2%80%99,+25+August.&ie=UTF-8&oe=UTF-8&gfe_rd=cr&ei=1oePVuPECYim8wfcoLbwDA

Notices

Commission Notice on the definition of relevant market for the purposes of Community competition law (97/C 372/03)

Notice 07/14 of the Transport for London – Taxi and Private Hire, available: http://content.tfl.gov.uk/07-14-taxi-and-private-hire-smartphone-apps-in-london-letter-to-drivers.pdf

Decisions

Hofner and Elser v Macrotron GmbH (Case C-41/90) [1991] ECR I-1979

Google/DoubleClick (Case COMP/M.4731) Commission Decision [2008] OJ C 184

Microsoft/Yahoo! Search Business (Case COMP/M.5727)

Articles and News

Lomas, N. (2015), “Uber Pulls Out Of Three German Cities After Court Ban Shrinks Driver Pool”, TechCrucnh, available at: http://techcrunch.com/2015/11/02/uber-retrenches-in-germany/#.prbkyj5:RjYZ

Lougher, G. and Kalmanowicz, S. (2015), “EU Competition Law in the Sharing Economy”, Journal of European Competition Law, available at: http://jeclap.oxfordjournals.org.proxy.library.uu.nl/content/early/2015/12/10/jeclap.lpv086.full.pdf+html

Oxera Compelling Economics, (2015) “A fair share? The economics of the sharing economy”. Available at: http://www.oxera.com/Latest-Thinking/Agenda/2015/A-fair-share-The-economics-of-the-sharing-economy.aspx

Reuters, “French court upholds ban on Uber’s service using non-professional drivers”, available at: http://www.reuters.com/article/us-france-uber-tech-idUSKCN0RM26C20150922

San Francisco Chronicle, “S.F. taxi owners, cabbies join forces against Uber, Lyft, others”. Sept 2014, available at: http://www.sfgate.com/bayarea/article/S-F-taxi-owners-cabbies-join-forces-against-5773407.php#photo-6898035

Wallsten, Scott, (2015), “The Competitive Effects of the Sharing Economy: How is Uber Changing Taxis?”, Technology Policy Institute, Studying the Global Information Economy, June 2015. Available at: https://www.ftc.gov/system/files/documents/public_comments/2015/06/01912-96334.pdf

Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”. Available at: http://people.bu.edu/zg/publications/airbnb.pdf

[i] See, information about the scope and impact of the sharing economy, at Crowd Companies. Author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/2014/09/29/a-day-in-the-life-of/ . See, also, information about the expected growth of the sharing economy, at Crowd Companies. Author: Jeremiah Owyang, available at: http://www.slideshare.net/jeremiah_owyang/sharingnewbuying , slide No. 12.

[ii] Australian Competition and Consumer Commission, “The sharing economy and the Competition and Consumer Act”, 2015, pg. 1.

[iii] Uber was founded in San Francisco, California, in 2009. It functions through an online platform that permits consumers to hire drivers that use their own cars. “Uber is evolving the way the world moves. By seamlessly connecting riders to drivers through our apps, we make cities more accessible, opening up more possibilities for riders and more business for drivers. From our founding in 2009 to our launches in hundreds of cities today, Uber’s rapidly expanding global presence continues to bring people and their cities closer”. See, Uber Website: https://www.uber.com/about . See, also, Stefansdotter, A., Utfall Danielsson, C., Kastberg Nielsen, C., Rytter Sunesen, E. (2015) “Economic benefits of peer- to-peer transport services”, Copenhagen Economics, Stockholm. pg. 3-4. , which are factors that could increase the demand for the servicetter Sunesen, E. (2015) irms might have a different result if

[iv] Airbnb was founded in San Francisco, California. It is “a provider of travel accommodation and a pioneer of the sharing economy, has served over 30 million guests since it was founded in 2008. Although Airbnb remains privately held, its valuation of over $10 billion now exceeds that of well-established global hotel chains like Hyatt”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”, pg. 2.

[v] “Our main result is that in areas where Airbnb is most popular the revenue of the most vulnerable hotels in our data has decreased by about 8-10% over the past five years”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”. pg. 3.

[vi] See, Commission Notice on the definition of relevant market for the purposes of Community Competition Law (97/C 372/03), in further, Commission Notice, para. 13.

[vii] “A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use”. “The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area”. Comision Notice on the definition of relevant markets. Commission Notice on the definition of relevant market for the purposes of Community Competition Law (97/C 372/03), para. 7-8.

[viii] Case C-41/90 Hofner and Elser v Macrotron GmbH [1991] ECR I-1979

[ix] Lougher, G. and Kalmanowicz, S. (2015), “EU Competition Law in the Sharing Economy”, Journal of European Competition Law, pg. 3.

[x] See Note 2, pg. 35.

[xi] See Commission Notice, para. 2.

[xii] See, Commission Notice, para. 36.

[xiii] See, Crowd Companies. Author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/category/collaborative-economy/

[xiv] See, Commission Notice, para. 15-17.

[xv] See, Commission Notice, para. 29.

[xvi] Commission Notice, para. 38. For example, “Taxis, badly losing the battle on San Francisco’s streets, are finally fighting back. After seeing 65 percent of their business migrate to ride services like Uber, Lyft and Sidecar, taxi drivers and company owners, at odds for decades, have joined forces — not only with one another but with their overseer, the Municipal Transportation Agency”. See, article: “S.F. taxi owners, cabbies join forces against Uber, Lyft, others”. San Francisco Chronicle

[xvii] See, information on the public perception of brand reputation of traditional business and sharing economy businesses, at Crowd Companies, author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/category/collaborative-economy/

[xviii] For example, in the UK, the OFT includes Uber in the private hire operator sector. See Notice 07/14 of the Transport for London – Taxi and Private Hire. See, also, Lougher and Kalmanowicz, pg. 8.

[xix] See, information about the growing supply of Airbnb in 2015, at Airbnb summer travel report: 2015, available at: http://blog.airbnb.com/wp-content/uploads/2015/09/Airbnb-Summer-Travel-Report-1.pdf

[xx] See, information about consumer’s preferences regarding accommodation options, at Jeremiah Owyang, available at: http://www.web-strategist.com/blog/2013/07/29/collaborative-economy-airbnb-loved-over-traditional-hotel-brands/ . Besides, for example, in the state of Texas in US, Zervas, Prosperio and Byers state that “(…) this estimate indicates that Airbnb listings result in some Airbnb stays that are substitutes for hotel stays in cities with an established Airbnb presence”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”, pg. 16.

[xxi] See Lougher and Kalmanowicz, pg. 5. See, also, Google/DoubleClick (Case COMP/M.4731) Commission Decision [2008] OJ C 184, para. 68 and Microsoft/Yahoo! Search Business (Case COMP/M.5727), para. 83.

[xxii] See Lougher and Kalmanowicz, pg. 7.

[xxiii] See, information about consumer’s potential of becoming suppliers in the sharing economy, at “Sharing is the New Buying: How to Win in the Collaborative Economy”, by Jeremiah Owyang available at: http://www.slideshare.net/jeremiah_owyang/sharingnewbuying

[xxiv] See, Commission Notice, para. 20.

[xxv] See, Commission Notice, para. 42.

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2 thoughts on “Market Definition and the Sharing Economy

  1. Daanish Naithani says:

    Hi!
    Could you please provide me with a link to the article cited in the above blog post, mentioned in footnote no. ix “Lougher, G. and Kalmanowicz, S. (2015), “EU Competition Law in the Sharing Economy”, Journal of European Competition Law”
    Thanks a lot.

    Like

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