Reconciling the Matchmaker Economy with Competition Policy

Posted by Social Science Research Network

 Reconciling the Matchmaker Economy with Competition Policy

By David A. Balto & Matthew Lane

There is no doubt that the enforcement of competition law is an important part of global business law and policy. Proper enforcement of competition law increases market efficiencies, allows for innovation and creative destruction, and ensures consumers will be able to access the best products and services. However, over-enforcement or improper enforcement can lead to the opposite results – destroying consumer welfare and halting vital innovation.

Balancing these concerns have led to many improvements in the application of competition law, especially concerning the use of economics to inform enforcement. Yet, more analysis is needed on how to analyze matchmaker businesses under competition laws, even though we are in the midst of a matchmaker platform renaissance. A matchmaker — sometimes referred to as a multi-sided platform — is a “business that helps two or more different kinds of customers find each other and engage in mutually beneficial interactions.” In fact, there have increasingly been calls for enforcement against 4 these business models without an adequate understanding how the economics differ from non-matchmaker models and how matchmaker platforms create consumer welfare. It is important we get enforcement right on these new platforms, which make up “three of the five most valuable companies in the world in 2015” and “seven of the ten start-ups with the highest market values.”

Despite its recent prominence in the economy, the matchmaker business model is not new. At its core, it is simply the easing of frictions that make it difficult for willing sellers and willing buyers to connect with each other. However, it wasn’t until more recently that economists recognized that matchmakers operate under different rules than traditional businesses. For example, matchmakers 7 often give away their product or even pay certain classes of customers for using their services. This practice, which would typically be eschewed in traditional business models, is often the only way for matchmakers to be successful. These business practices, which can be an essential way to attract certain

groups of platform users, can also look very strange to competition law enforcers. Simply shoe-horning these practices into traditional competition law claims, like predatory pricing and tying, risks wrong-headed enforcement that will harm consumers and can prevent new entrants into markets dominated by established players. In order to properly enforce competition laws, we must understand how consumer welfare is created in these new matchmaker businesses.

This paper uses the Android operating system, which is the subject of an EU competition law investigation, to examine how consumers benefit from matchmaking platforms and how improper enforcement of competition laws can lead to a decrease in consumer welfare and a less competitive market.

I. The smartphone operating system as a case study

Smartphone operating systems (“OS”) exemplify the challenges facing competition law enforcement for matchmaker platforms. Let’s say that there are ten smartphone companies that each have their own OS and ten percent of the market. Through competition each produces a phone and an OS of roughly equivalent quality and price. To a competition enforcer, this might sound like a dream market, but to marketplace participants this scenario is a nightmare. App developers will have to devote resources to localize their software to each OS – a process called porting – and each localization will only give them access to ten percent of smartphone consumers. Except perhaps for the largest developers, this number of localizations is likely to be cost prohibitive. These are not one-time costs but rather require ongoing localization efforts due to the need to update apps to provide enhanced features or address bugs. For this reason app developers have historically tended to launch their apps on one or two mobile platforms, though they find additional distribution on traditional computers and emerging smart 8 devices (such as gaming consoles, smart speakers, and more). Finally, to the extent that developers were willing to port across all platforms, they likely would develop apps based on “lowest common denominator” specifications that facilitate porting across platforms but lack the full functionality provided by any given platform.

For a consumer, this world looks even worse. Consumers would have to worry about whether the platform they choose will give them access to the same apps that their friends, family, and coworkers use. Consumers would have to worry about what would happen if their platform dies if it starts losing share or can’t adequately monetize. Consumers would be looking at a patchwork of apps, since most app developers wouldn’t be able to cover all ten OSs.

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