Anatomy of a competitive online marketplace - Philippine Competition Commission

Anatomy of a competitive online marketplace
By Atty. Amabelle C. Asuncion
July 15, 2020

Are you looking for a hard-to-find product? Or perhaps a pantry supply that ran out? Or maybe personal hygiene products that you cannot go out to buy because of fear of Covid-19? Look no further, the marketplace is right in your home.

The past four months that glued everyone home has fueled the growth of the digital marketplace to unanticipated levels. Whereas there were only a number of online stores viewed as a distant alternative to brick-and-mortar stores, the so-called new normal has propelled digital platforms to the top-of-mind option for consumers. New forms emerged to respond quickly to the pressing demand for access to basic necessities amid the lockdown and to the counterpart need for an avenue to dispose of available inventory or simply earn a living. One such form that has become immensely popular is the online marketplace.

This marketplace makes use of the group chat feature of instant messaging and social-media platforms where an administrator creates an online community for sellers and buyers to join. Sellers can post their products and buyers can place their orders directly with the sellers. Buyers can likewise post “looking for” inquiries to which sellers can respond. Some marketplaces accommodate all types of products while others cater only to particular types of products, for instance, only food products, or even more specialized, such as baked products. Some are geo-specific while others are general. Some marketplaces could be as small as the number of residents in a village; others could have more than 50,000 members from all over the metro.

Clearly, the online marketplace is more than a novelty; it has become a service that addresses multifarious needs all at once. Like any market, however, the rules of fair competition are relevant. Quite interestingly, online marketplaces instinctively developed their own rules. While most of their rules are for the convenience of both sellers and buyers, some have implications on competition which impact competitors and consumers. How then do you keep the online marketplace competitive? Here we dissect the anatomy of an online marketplace.

The administrator. S/he created the marketplace and is the one who sets out and implements the rules. S/he can delete posts and ads, reject registration of sellers, ban sellers, and remove buyers. The administrator may or may not be a seller himself/herself. An administrator who is also a seller, however, has a responsibility to act fairly. S/he should not use the authority to accept, reject, and ban sellers to prevent entry of competitors into the marketplace. This is especially significant in community marketplaces that cater to a specific geographic location where considerations such as delivery/transportation costs, logistics, perishability of goods, and time are important to consumers. There are also marketplaces where the primary consideration is trustworthiness of sellers. An example would be marketplaces for second-hand products. Second-hand buyers joining a marketplace that conducts a vetting process of sellers before admitting them are likely to limit themselves to that marketplace when looking for second-hand products. In these types of markets, unreasonable denial of entry of competitors would create monopolies and leave consumers with no choice. At a time where consumer options have already been severely limited by health and economic constraints, competition in the markets that consumers are increasingly relying on must be safeguarded.

Pricing information. In some marketplaces, sellers are required to provide pricing information upon registration. An administrator who is also a seller must not use this advance information to deny registration to a competitor that is offering its products at a lower price or to undercut it before allowing its entry into the marketplace. Neither should this information be used to agree on a price range for the product that they are both selling. In all of these scenarios, consumers are at the losing end.

Limitations on products. Some marketplaces have rules disallowing sales of identical products or products of the same brand. Others limit the number of suppliers per product type. In a desire to help sellers, there could be a tendency to allocate the market among products or brands rather than have several sellers offering the same products. If various alternative marketplaces exist for both sellers and buyers, this would be less of a concern. However, if a specific marketplace is viewed by buyers and suppliers as a class on its own, such that they are not likely to see other marketplaces as equivalent alternatives to sell or buy products from, then limiting the number of suppliers per product or brand in that market would be anti-competitive.

Overpricing; lowballing. Two popular rules adopted by many marketplaces relate to price: no overpricing and no lowballing. The prohibition on overpricing aims to protect buyers while the prohibition on lowballing is for the benefit of sellers. Violation of either rule gives the administrator the right to ban the concerned seller or buyer. However, most marketplaces do not have standards for what is considered as overpricing or lowballing. Thus, although these rules may have merit, they are vulnerable to subjectivity on the part of the administrator who has the power to remove sellers and buyers from the marketplace. To be sure, the pricing behavior of big sellers and big buyers are subject to scrutiny when these have the effect of exploiting customers or squeezing out competitors. However, it is a judgment that should not be used to substitute for the price that may be determined by the market. What an administrator should therefore ensure is the existence of competition in the marketplace by not unduly restricting entry of sellers.

Regulated posting. A common rule is the limitation on posts and advertisements to one per day. In some marketplaces, the privilege of promoting through photos or streams is reserved to the administrator. The stated reason for this rule is to avoid spamming. However, it can also stifle competition. In a regular market, advertising and promotion is part of the competition. Companies invest huge capital in brand marketing in order to attract and maintain customers. The more aggressive the promotions are, the more likely the company can boost its sales. This also benefits consumers as they are able to learn more about the product and compare across competing brands. The regulations on posting should not dampen such competitive spirit in the online space.

Closing friendly reminder. The list of rules ends with an affirmation of the purpose for which the marketplace was created—for buyers to find what they want and for sellers to do business. This is accompanied with a friendly reminder for all members to show respect and practice proper business etiquette, under pain of banishment from the marketplace. This is as good a reminder that business etiquette includes fair play and that the virtual marketplace can only truly fulfill its purpose if it is kept competitive.

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Before her appointment to the Philippine Competition Commission, Commissioner Amabelle C. Asuncion was engaged in corporate practice and served as chief legal counsel of a top company and a partner of a law firm. She was also previously involved in legislative, law and policy reform, advocacy, and adjudication work. Commissioner Asuncion has a master of laws degree (with distinction) in international legal studies from Georgetown University Law Center in Washington, D.C., and is admitted to the New York bar.

(Originally published on Business Mirror’s Competition Matters column on July 15, 2020 here.)