Anti-monopoly regulation of digital platforms in China

15.03.2023

CeCo EE.UU

With the rapid development of digital platforms and the digital market, people are more and more dependent on these programs installed on phones and laptops. The big tech companies started to show their unexpected power because of their quasi-public attributes (Jin & Yuxin, 2021).

At the same instant, governments around the world started to attach greater importance to antitrust issues raised by digital platforms (Palmer, 2020). China has not been the exception; being one of the largest economies in the globe with some of the biggest undertakings in the world digital economy, including Alibaba, Tencent and ByteDance (developer of TikTok), the Chinese government has shown great concern for any existing and potential market power abuse within the tech markets. Thus, it has taken a series of measures, including the enactment and adoption of regulation concerning competition in digital markets, with its correspondent exposure draft. This article aims to provide an introduction to these regulations and drafts.

Context

Since 1990s there has been an enhanced development in science and technology, which has led to create and spread different tools such as big-data, cloud computing, artificial intelligence and blockchain. This revolution has made digital markets become a part of people’s daily life. In other words, it is fair to state that the virtual economy drastically changed the human lifestyle, in which platforms have come to play an infrastructure role (just like roads, and ports, among others), opposing challenging pressures on the Antitrust systems in order to regulate them.

The surveillance of these tech markets is not an easy task, especially because of some of their unique features, such as winner-takes-all situation, or size-effect, which raises barriers hardening the entry of new competitors and making them a perfect scenario for the proliferation of monopoly power and its abuse (Dai & Deng, 2020). Indeed, is not seldom seen big digital platforms implementing all sorts of strategies to expand their user scale, and leverage their market power in order to develop or buy new businesses (complementary or vertical activities) that allow them to build a digital eco-system, fostering their influence over consumers, suppliers, and business clients.

In this sense, the traditional theories of harm on monopolization, abuse of dominance or merger control are rather in a straitened circumstance when facing the concerns raised by digital markets. Especially given that the traditional test applied for detecting market power is based on price as a key factor, which is hard to implement in the digital platform field since these companies usually provide free charge services to users while profiting from the sale of data and advertisement (Jin & Yuxin, 2021).

This is just one small sample of the perils that currently the competition agencies are facing and that constraint us to rethink basic concepts, such as the market definition, which is another of the traditional and sensitive topics that the digital eco-system is questioning (see CeCo’s article: “Digital Platforms: Difficulties for defining relevant markets”).

The Era of Digital Market Anti-monopoly in China

China is one of the countries most exposed to the above mentioned, not only because is one of the leading economies, but also because digital platform and digital economy are right now one, if not the leading force for economic development in the country. Therefore, the development of suitable methods of regulation is one of the prime concerns of the Chinese Government.

In China, Competition or Antitrust Law is referred to as Anti-monopoly law. In 1994, the Standing Committee of the National People’s Congress included the enactment of an antitrust law in its legislative plan (Meng Yanbei, 2017). The Anti-monopoly Law of the People’s Republic of China (hereinafter referred to as the “AML”) was first enacted in 2007.

In 2020 and 2021, Chinese government changed the tolerant attitude it had in the past toward the wild development of big tech companies and their digital platforms and started to strengthen supervision, due to the serious concern raised by the disorderly expansion of capital in the digital market (Liyang, 2023).

For example, in 2021, DiDi went public in the New York Stock Exchange without complying with the Provisions on Strengthening the Confidentiality and Archives Management Related to the Issuance and Listing of Securities Abroad. Another illustrative case is the one of “ANT”, a financial and online-payment application owned by Alibaba, which sold financial products and provided deposit services for many banks. In 2020, ANT provided services from over 100 banks, had over one billion users, and had a balance of consumer credit for 1732 billion RMB (Ant Group’s prospectus for listing in Hong Kong Exchange). However, at that time, there were no relevant regulations concerning the services it provided, leaving a relatively gray area, and causing tremendous systemic financial risks.

The government started to increase the regulations in digital market, including specific anti-monopoly provisions, and thereafter started a new era of competition law in this economic sector. In December 2020, the Central Economic Work Conference stressed “efforts against business monopolies and disorderly capital expansion” as one of the country’s top priorities in 2021 (see full text communique of the 2020 Central Economic Work Conference).

In February 2021, only three months after the release of the draft version, the Anti-Monopoly Commission of the State Council of China issued “Guidelines of the Anti-monopoly Commission of the State Council for Anti-monopoly in the Field of Platform Economy” (hereinafter referred to as the “Platform Guideline”).

Later that year, the State Administration of Market Regulation (hereinafter “SAMR”) imposed a 182 billion RMB fine ticket to Alibaba, for forcing merchants to sell exclusively on its platform, a practice known as “pick one of two” in China, among other issues. Besides, SAMR fined many other companies for failing to file merger notifications (see press releases here and here).

In October 2021, SAMR released both the drafts of “Classification Guidelines for Internet Platforms” (“Classification Guideline”); and “Guidelines to Implementing Subject Responsibility for Internet Platforms” (“Responsibility Guideline”) (see press release here).

Moreover, in 2022, China amended the Anti-monopoly Law of the People’s Republic of China. After this amendment, the 2022 AML specifically mentions the digital platform monopoly conduct, especially in two sections: the “General Provisions” part and in the “Abuse of Dominant Market Power” part. In the General Provisions part, Article 9 establishes: “An undertaking shall not engage in any monopolistic conduct prohibited by this Law by utilizing data and algorithm, technology, capital advantage, or platform rules, among others. On the other hand, in the Abuse of Dominant Market Power section, Article 22(7) says that “An undertaking with a dominant market position shall not engage in any conduct of abusing a dominant market position specified in the preceding paragraph by utilizing data and algorithm, technology, and platform rules, among others” (author’s translation).

It is not commonly seen, at least in China, that a law setting forth the general frameworks of a legal field, specifies the particular application of its provisions for a specific industry. Therefore, these rules demonstrate the Chinese government’s special attention towards anticompetitive conduct in the tech markets and lay the foundation of China’s digital economy anti-monopoly legal system.

Guidelines for Anti-monopoly in the Field of Platform Economy («Platform Guideline») 

The Platform Guideline provides a detailed interpretation of the surveillance that the government would like to implement. It mainly consists of five parts, namely: General Rules, Monopoly Agreements, Abuse of Market Dominant Position, Economic Concentrations, and Abuse of Administrative Power that caused exclusion or a restraint of competition. Note that the “abuse of administrative power” is the rule that prohibits any unreasonable exercises of governmental power hindering the free flow of goods or funds, or that treats different corporations unequally.

General Rules

The Platform Guideline sets forth the basic working principles in the digital market field for the anti-monopoly enforcement agencies, which must protect fair market competition, conduct scientific and efficient regulation, stimulate innovation, and safeguard the lawful interests of all parties.

Abuse of Market Dominant Position

When trying to identify the relevant market in the digital sector, the Platform Guideline sets the substitutability analysis as the basic method for this purpose. Taking into account the platform’s two-sided nature (both supply-side and demand-side), single or double side substitution analysis can be applied, depending on the facts of different cases.

To identify whether a platform has market power, the referred guideline points out several key factors such as the platform’s market share, its ability to control the market, the role it plays in the market (how much do platform-based operators who provides goods or services within the Internet platform rely on it), its financial and technical condition, the structure of the relevant market, and market entry.

For abuse of market position, the guideline lists the following conducts as typical behaviors that show the abuse of market power: unfair pricing, selling with below-cost price, refusal to deal, restraint of trade, tying (or attaching unreasonable trading conditions), differential treatment, and big data discriminatory pricing.

For selling with below-cost prices, the main focus is whether the platform’s intention is to exclude other competitors from the market, and whether it is possible to increase prices to gain undue benefits, harm fair competition in the market and the legitimate rights of consumers after the exclusion of other competitors. Discounting in a reasonable period of time, for the purpose of opening up a new market and attracting new users would be acceptable. This rule would be a powerful tool to curb the price war between online service platforms when competing for users (for example, the price war between DiDi and Uber).

When talking about refusal to deal, the Platform Guideline set up the key factors that should generally be considered when the agency is deciding whether a platform constitutes a necessary (or essential) facility. These factors are: the data that the platform holds, its substitutability, the feasibility of developing alternative platforms, and the dependence of users on the platform.

For restraint of trade, tying or attaching unreasonable trading conditions, and differential treatment, the guidelines mainly focused on the role of the company’s policy and algorithm when it is conducting those monopoly behaviors.

Monopoly Agreement

For monopoly agreement, the guideline points out that, besides agreements in writing or verbal form, conducts with substantive coordination and consensus, achieved by data, algorithms, platform rules or other methods could also be viewed as monopoly agreement.

For horizontal agreements, the guidelines mention the pacts in which the platform asks operators to provide equal or superior terms to which is providing to other competitive platforms, also called “MFN” (most-favored nation) clause. The guidelines consider that these arrangements may constitute an anticompetitive agreement (specially hub-and-spoke collusion) and may also constitute an abuse of dominant market positions.

Concentration and Merger Review

For the platform merger review, the guideline gives a detailed calculation method when determining the turnover of the platform. For operators that only provide information in exchange for a commission or other service fees, the turnover may be calculated according to the service fees charged by the platform and other income of the platform. If the platform itself specifically participates in market competition on one side of the platform or plays a leading role, calculation of the turnover may also consider the transaction amount involved in the platform.

Abuse of Administrative Power

The guideline also mentioned the abuse of administrative power in the digital market field, containing the possible local protectionism toward certain tech companies.

The Platform Guideline, as the first anti-monopoly guideline in the digital platform field, covered all the main aspects of the digital platform monopoly and its regulation, responds to some hot topics in this field, and can be a great tool for digital platforms to improve compliance. Definitely it is a useful guidebook for anti-monopoly enforcement officials and companies in compliance with their legal duties (Cheng, 2021).

Draft of Classification Guideline and Responsibility Guideline 

If the AML and the Platform Guideline is about ex post supervision, then the draft of Classification Guideline and Responsibility Guideline is more about ex ante regulation.

From the draft of these two documents, we can see that they mainly focus on the classification of the digital platforms based on their businesses and popularity, in order to determine the company’s main responsibilities (thus following a similar approach of what has been done in the European Union with the DMA and in Germany with the GWB-10). It is important to highlight that the drafts are proposing special responsibilities for ultra-large platforms, to which we are referring below.

The Classification Guideline defines a “digital platform” as one that uses internet technology to connect people and goods, services, information, entertainment, money, and computing, in order to provide trading, social, entertainment, information, financing, computing, and other functions.

The Classification Guideline identifies the following six types of platforms according to the different kinds of connections and functions typically provided by them: (i) online sales platform: connects people and goods and provides trading services; (ii) life service platform: connects people and service; (iii) social entertainment platform: connect people to people; (iv) information platform:  connects people with information; (v) financial service platform: connects people and funds; and (vi) computing service platform: connects people and computing power.

Under these six types of platforms, there are even more detailed divisions. Then, based on the amount of annual active users, the business scope, the value of the company, and the ability of the platform to restrict or impede merchants’ access to consumers, the Classification Guideline divides the digital platforms into ultra-large, large, and middle/small platforms, as illustrated in Table 1, below.

Table Nº1

Compared with similar regulations in the EU and the US, China’s draft of Classification Guideline has stricter standards. The threshold of market value and users scale is much lower than US and EU (100 billion RMB vs. 75 billion EUR or 600 billion dollars; 50 million users vs. EU 45 million), and does not consider the amount of merchants on the platform or the yearly turnover. However, the draft of Responsibility Guideline seems to be vague and makes it hard to implement (Hou Liyang, 2023).

Perhaps due to the diversity of the digital platform industry, the services they provide, and the complexity of their monopoly behaviors, SAMR hasn’t issued the final and effective version of these two guidelines, although the draft of these two guidelines was released in 2021, until now.

Vision of Future

On March 5, Li Keqiang, Premier of the State Council, outlined the priorities of the government’s work for the 2023 yearly Session of the National People’s Congress. He described the government’s attitude as “vigorously developing the digital economy, raising the level of normalized supervision, and supporting the economic development of the platform.”

Unlike previous trends of continuous growth, in 2022, there is a slight decrease in China’s digital market (Operation of Internet industry and related services in 2022). Recovering from the pandemic, China considers the tech sector an important pillar of the nation’s economy and hopes to promote the development of digital market. Therefore, we can see the government’s shifting attitude toward one more in pro of digital platforms and the digital economy (Iris Pang, 2022).

But this does not mean a relaxation of supervision upon digital platform monopoly behaviors. Anyhow, there is still a question about when we may expect the enactment of the official version of the Classification Guideline and Responsibility Guideline. They would be an important tool to “raise the level of normalized supervision”, along with the Anti-monopoly Law and other regulations that keeps the big tech players in their seat.

Related links & books:

• Jin & Yuxin, 2021: The Monopoly and Governance of the Platform Economy in the Digital Era 
• Palmer, 2020: It’s High Tide Again in Internet Markets
• Dai & Deng, 2020: Big Data and Antitrust Risks in Close-Up: From the Perspective of Real Cases
• Meng Yanbei, 2017:  Introduction to Anti-Monopoly Law
• Liyang, 2023: How Should China Make a Choice in the Regulation of Platform Monopoly: Strengthening Anti-Monopoly or Introducing Sector-Specific Regulation?
• Cheng, 2021: Analysis of the digital platform guideline
• Pang, 2022: China’s digital economy: Divided but growing

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