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Archive for October 3rd, 2019

Comments on Android (I): some questions for economists on market definition

with 9 comments

I have a question

Like many others, I guess, I jumped on the Android decision as soon as it became available (see here). If you have not done so, you should definitely read it. It provides abundant food for thought. It is not an exaggeration to say that a whole competition law course could be taught around it. Pretty much all the (unresolved) issues are there, in a fascinating factual setting with plenty of intriguing ingredients.

It would be great if the decision were widely discussed. The general interest is not served when only those with an interest in a case talk and write about it. When there is so much at stake, the atmosphere tends to get ugly and aggressive (footballised, if you want). The youngest among you should not feel discouraged: you can change the tone of debates by asking questions and/or sharing your views.

I thought I would kick off (no pun intended) with the issue of market definition and dominance, which has attracted a great deal of interest. One of the most intriguing aspects of the original press release was the suggestion that the Apple and Android ecosystems do not constrain each other. The detailed rationale behind this conclusion is now there for all to see.

Since the definition of the market and the assessment of dominance are essentially economic exercises, the right way to go about it is to raise some questions to specialists. It would be wonderful if you could share your thoughts on the comments section.

I will not discuss all aspects of these two questions, just the two that I find to be particularly interesting. Some people may react by saying that these two questions are not even decisive. To which I reply: perhaps, but I am not, and have never been, interested in the outcome of individual cases. Plus, there are more posts for discussion coming up.

One of them relates to the app store. According to the decision, there is a separate market for Android app stores. The most salient implication is that Apple’s app store would be on a separate market. In the same vein, the constraint placed by Apple’s app store would not be sufficient to rule out a finding of dominance.

The second concerns the market for operating systems. The Commission concludes in the decision that there is a separate market for the licensing of smart mobile OS. Again, non-licensable smart mobile OS (read: Apple iOS) are found not to be on the same market. What is more, the constraint coming from Apple iOS is not deemed strong enough to exclude a finding of dominance.

App stores as two-sided markets? What are the implications?

The first set of questions is for economists in general and for Lapo Filistrucchi in particular. As most of you know, Lapo – together with his co-authors – has written influential work on two-sided markets. In part, his research seeks to tame people’s enthusiastic tendencies to see two-sided markets everywhere. So whenever I notice a setting that might be a two-sided market, I ask myself what he would say.

My (cautious) impression is that the app store is a two-sided market. Would that be correct? Using Lapo’s helpful categorisation, I am inclined to conclude that it is a transaction market (in an app store, there is a transaction between the two sides of the market). Hopefully full points so far.

If I understand the scholarship on two-sided platforms correctly, it would follow that there is a single market encompassing both sides. Even more interesting is the analysis of the competitive constraints. My question here I guess is: how are the constraints evaluated in practice?

In this regard, the decision provides a fascinating case study. If you read the decision (paras 652-673), you will see that the Commission focuses, by and large, on Android end-users’ inability and/or unwillingness to switch OS (and thus phones). I guess my question here is: is this factor decisive?

According to the Horizontal Merger Guidelines, the absence of switching opportunities does not rule out a horizontal overlap (that is, a competitive constraint). I would say that, in a two-sided market, the fact that one side of the market cannot (or would not) switch is even less decisive. I would welcome thoughts and clarifications in this sense.

How about the other side of the market? Less importance is given to app developers in paras 652-673. But it is worth reading para 668, where the Commission states (uncontroversially, I would say) that app developers would not switch away from Android because they could not afford to do so.

My question here is: does it follow from that – uncontroversial – finding that Android’s and Apple’s app store do not constrain each other? As I read para 668, I thought of an Australian-like country with two very large supermarket chains (I visited Australia in 2013 and what I paid for groceries still haunts me). Many suppliers would not be able to give up either supermarket chain in such a scenario. Would it follow that the two chains do not constrain each other?

Android as a franchise and the analysis of indirect constraints

When I first wrote about Android, I suggested that the underlying business model is best understood as a form of franchising. I am still of this opinion after reading the decision. Just like McDonald’s, Google licenses its formula so that third-party OEMs can sell their products alongside vertically-integrated manufacturers (euphemism for Apple).

Seen from this perspective, the Android decision claims that the licensing of the formula by the franchisor is a separate product market. Even more interesting is the finding that the franchisor is not constrained by Apple. As I see it, it would be tantamount to suggesting that McDonald’s would not be constrained by vertically-integrated fast-food hamburger restaurants.

It may be a counterintuitive claim, but it is extensively supported by two sets of arguments. First (paras 483-496), I understand the decision as suggesting that the OS is one of many features found in a smartphone, which would allow McDonald’s (I mean, Google) to decrease the quality of its operating system without suffering the consequences. In other words, the Commission conducted an SSNDQ analysis. I find it great that we will be get some guidance about the robustness of this exercise (question: has the GC ever reviewed an SSNDQ assessment?).

Second (paras 497-559), the same arguments discussed above (including the fact that app developers would not be able to afford abandoning Android and Android users’ inability and/or unwillingness to switch OS and devices) are also advanced to rule out that vertically-integrated systems constrain non-integrated ones. So the same questions I raised above would be relevant here too.

In addition, the Commission emphasises the price differences between Apple and Android phones. Again, here my main question for economists would be: how decisive are these price differences? Similarly, I would also ask about the implications. How about high-end Android devices? Would it follow that further segmentation of the market is warranted?

As said above, I very much look forward to your reactions.

In case you were wondering (which I would understand): Alfonso and I generally comment on each other’s posts prior to publication. Not this time. I have not shared or discussed this post with him (nor will I share or discuss any of the subsequent posts in this series). So now you know the answer to the question ‘why are there even more typos than usual in Pablo’s post?’.

Written by Pablo Ibanez Colomo

3 October 2019 at 11:11 am

Posted in Uncategorized