Singapore: The Benefits And Harms Of e-Commerce On Competition Law

Last Updated: 12 April 2017
Article by Gerald Singham and Mark Tan

Introduction

Electronic commerce has gained significant popularity globally in recent years. As the internet became more familiar, and traditional biased attitude towards bricks-and-mortar retail shops fade, more businesses begin to embrace e-commerce and more consumers shop online. Competition law is also becoming increasingly widespread in the ASEAN region, with all ASEAN member countries enacting forms of competition legislation and each having a competition law regulator to ensure the enforcement of such law.

Antitrust regulators in more mature jurisdictions such as Europe, the United States and Japan have realised the importance and a few have taken further by commencing investigations, or conducting market research and/or economic studies involving this sector.

This article highlights the main competitive benefits brought about by e-commerce and related competition law risks.

Competitive benefits

  1. Lower prices: E-commerce generally increases competition within the market and has proven to lower prices. The lowering of search costs, in combination with cost savings through improvements in the supply chain, has significant pro-competitive effects. There is also direct evidence that the adoption of e-commerce has resulted in lower average prices in relation to certain products such as air tickets, books, cars, CDs and life insurance.
  2. More efficient distribution: E-commerce can streamline supply chains and significantly reduce distribution costs. For example, manufacturers and end customers may connect more easily and transact directly, obviating the need for the middleman. The resulting benefits would include: (i) improved efficiency in the supply and distribution of different types of goods; (ii) increase in variety of goods supplied; (iii) development of omni-channel business mode; and (iv) a change of the role of intermediaries, e.g. by eliminating the need for certain types of intermediaries or by enabling the emergence of new types of intermediaries.
  3. Stronger competition: E-commerce may also increase market competitiveness by potentially lowering barriers to entry. For example, establishing an online presence would be cheaper than investing in a physical brick-and-mortar retail store. In addition, with market network platforms such as Amazon and Qoo10 offering smaller retailers a low-cost route to reach to the market, it might seem that entry barriers have become much lower.
  4. Better choices: E-commerce can reduce search costs, and with buyers being better informed, sellers may need to compete harder to win and retain business. New products and services may be introduced faster, and the variety of products offered may increase. Online retailers are much less constrained than their brick-and-mortar counterparts by rack or shelf space and can typically stock a wider range of products. Reduced search costs makes it easier for consumers to locate what they want, supporting a shift of demand towards niche products.
  5. More information: E-commerce makes it easier for firms to collect detailed data about consumer purchasing behaviour and potentially use the data to the mutual benefit of the firm and the consumer, for example by personalising the shopping experience for each customer.
  6. Wider geographic market: E-commerce businesses can increase the size of their geographic markets just as long as there is access to a wide logistics network. Online shoppers nowadays have access to a far greater range of suppliers, including suppliers from other countries. This is because the cost for consumers to visit a website is independent of its geographic location. Other factors such as cheaper and faster shipping further reduce barriers associated with buying from retailers located further away. For digital goods and services that can be delivered electronically the geographic market will be limited by bandwidth rather than by distance.

Anti-competitive harms

On the flipside, there have been certain anti-competitive behaviour which have arisen (e.g. due to network effects or price transparency) or which are facilitated or intensified due to e-commerce.

  1. Price obfuscation: Some online retailers, by virtue of their business, are adversely affected by price comparison due to e-commerce, these retailers may attempt to engage in price obfuscation tactics that make it more difficult for consumers to search and compare prices online. For example, add-on pricing schemes where a retailer will advertise prices of low-quality products on a price comparison website but do not make the price of higher-quality upgrades easily observable. Customers will only be aware of the additional prices when they are at the retailer's website. In this way, the margin earned on high-quality versions might be competed away by lowering the price of the low-quality product to attract consumers. Retailers would have an incentive to maximise the proportion of customers who choose to upgrade, e.g. by taking a low-cost, high-value feature out of the low quality version and make it available in the high quality version.
  2. Better conditions for collusion: Greater price transparency may also facilitate collusion among firms as monitoring of competitors' behaviour becomes easier. The risk of co-ordinated outcomes may also increase with the growing use of intelligent software systems that use pricing algorithms in combination with market data to set prices. Such systems are more effective as they are better at detecting and punishing deviant behaviour and are less tempted than their human counterparts by short-run gains to deviate from the collusive outcome.
  3. Network effects: If retailers find it difficult to switch between one selling platform to another (due to losing of their reputation) and when platform users cannot or do not multi-home (i.e. use multiple platforms in parallel), such platforms are competitive bottlenecks, potentially capable of exercising market power and leveraging it into adjacent markets. Network effects coupled with vertical restraints, can cause foreclosure in the relevant markets.
  4. Vertical restraints are restrictions imposed by parties on different levels of the distribution chain, for example, the restrictions placed by a manufacturer and a wholesaler. Vertical restraints are often applied to protect non-price dimensions of competition (e.g. in the form of exclusive or selective distribution arrangements to prevent free riding on a distributor's provision of customer service) and may be seen as pro-competitive.

Examples of vertical restrictions in e-commerce:

  1. Price recommendations: Over two in five retailers face some form of price recommendation or price restriction from manufacturers;
  2. Restriction on selling online: Almost one in five retailers are contractually restricted from selling on online marketplaces;
  3. Most Favoured Nation clauses: Almost one in ten retailers are contractually restricted from submitting offers to price comparison web sites;
  4. Cross border market sharing clauses: Over one in ten retailers report that their suppliers impose contractual restrictions on cross-border sales.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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