Jet Deng and Ken Dai, Dentons
Another “double eleven” – the most-celebrated Chinese shopping season around 11 November – is approaching this year. Last year, Alibaba’s B2C online retail platform Tmall reached a total turnover of 268.4 billion yuan (about US$40 billion) in a single day. Other platforms are not very far behind. For example, Tmall’s major competitor, JD.com, has also reached 200 billion yuan, accumulatively from 1 to 11 November. The figures show the size China’s digital economy.
Along with the annual shopping season is the continuously infamous battle between Alibaba and JD.com, with the practice of what we call “choose one from two” (“二选一” in Chinese). It is actually similar to exclusive dealing in the traditional sense – sellers are asked by one platform to shut stores on competing platforms, otherwise shoppers would no longer be directed to their products on this platform (or even relevant stores or products are suspended outright). The practice has become so common that the central authority the State Administration for Market Regulation (SAMR) has to warn people beforehand almost each shopping season. Right before the “double eleven” of 2019, a judicial decision made by the Supreme People’s Court was released, in which the court made a jurisdiction ruling on JD.com’s claim against Alibaba for abuse of market dominant position under the Anti-Monopoly Law of China (AML). Following that, two other top-tier e-commerce sites, Vipshop and Pinduoduo, announced to have applied to join this lawsuit as third parties and together denounce Alibaba’s “choose one from two” practice. It seems that the controversial practice may expect a ruling soon on substantive issues as to its legality.
However, for as long as the practice is in existence in e-commerce, the complainers are not that innocent. For example, JD.com was itself as well accused by another B2C company, Suning.com, of “choose one from two” in 2017 – a similar fight allegedly between No. 2 and No. 3 of B2C in China. As for smaller players, recently Vipshop (an e-commerce site specialising in online discount sales) was also accused by an inventory distribution platform Aikucun for exactly the same practice.
Other than the shopping platforms, “choose one from two” can also be easily found in other e-commerce areas. Food delivery platforms, for example, Meituan, are also forcing restaurants to pick between itself and its competitors, like Ele.me or previously Baidu Food Delivery. During the covid-19 isolation period earlier this year, during which online food delivery boosted in China, Meituan was again reported jointly by merchants and even industrial associations in multiple places to have adopted such unfair practices. For another illustration, the online travel agency area was also hit, and this time Alibaba had fallen victim to it as Ctrip was once the bully in this market.
Rather than a simple “right” or “wrong”, it looks more like great trees are keeping down the little ones. Therefore, this article intends to explore whether “choose one from two” is a justified practice, and if so, to what extent. Although in China it could also be analysed from the perspective of the Anti-Unfair Competition Law or the E-Commerce Law, this article will be focusing on the AML only. Against the backdrop of the rolling antitrust snowball for tech giants throughout the world, hopefully “choose one from two” could provide a valuable perspective that cuts through the myth.
The existence of dominant positions in the relevant markets is the precondition of abusive conducts. And there should be a consensus on the definition of relevant markets before finding this dominant position. Since the dominant position could be presumed based on market share numbers, market definition often becomes the battleground that the parties are keen on. Among the hundreds of public enforcement cases since the AML’s effectiveness in 2008, there are a few dozen abuse cases. The difficulty in defining the relevant market and consequently in establishing dominance could be part of the explanation.
Moreover, among the dozens of abuse cases of public enforcement so far, none are against e-commerce platforms. Establishing a dominant position in the digital market, as comparing to the traditional markets, is even complicated by its special attributes such as network effects, bilateral and even multilateral markets, and users’ multi-homing attributes.
But we could have a glimpse of how these factors may play out in a private dispute as early as in 2014 – Qihoo v Tencent decided by the Supreme People’s Court with regard to the instant messaging service market in Mainland China, a highly volatile market that predates the mobile era. In this case, the court held that it is not necessary to clearly define the relevant market in every case of abuse of market dominance. Without a clearly defined relevant market, the market power of the enterprise concerned and the potential impacts of the suspected abuse on the market can be evaluated by direct evidence proving exclusion or elimination of competition. Moreover, though, generally, the higher the market share is, the more likely it is to indicate the existence of a dominant market position, market share is nonetheless only a rough and potentially misleading indicator of market dominance, especially in consideration of the highly dynamic competition in the internet environment.
Based on the experience of various jurisdictions, it seems to be the consensus that, in the digital market, an enterprise with a high market share does not necessarily imply a dominant market position, and the ability to maintain this market share in the relevant market is more important when assessing market power. Moreover, obvious innovation advantages may help to attract consumers and achieve a high market share over a short time. For instance, at the beginning of the development of QQ, an instant messaging software of Tencent Inc, MSN developed by Microsoft has the largest market share in the instant messaging service market in Mainland China, which is more than 50%. Soon, QQ’s market share exceeded MSN. But now, with the evolvement of mobile internet, QQ itself has been replaced in China by another messaging service also developed by Tencent – WeChat.
Although market share has been greatly weakened as an indicator to reflect the market power of an enterprise, what can establish market power is very much open to discussion. The authorities do not give clear guidance. Instead, some such practices are handled and penalised under the Anti-Unfair Competition Law to avoid the tough question of proving market dominance. Unless and until this problem can be solved, it would be difficult to scrutinise “choose one from two” under the AML.
At a glance, “choose one from two” is very close to exclusive dealing. The merchants are tied to run online business at one site on the condition that they will not run such business at other similar sites. Otherwise, they will be disadvantaged by the site. For example, some sites may screen searches related to a non-compliant merchant so that shoppers won’t be directed to this merchant. Some sites can be more rigorous in that they will simply ban the non-compliant merchant.
In China, exclusive dealing is regulated as one of the abusive conducts under the AML. According to enforcement practices, it is not limited to an “all-or-nothing” restriction. Last year, in an abuse of dominance case, the local authority determined that some seemingly normal behaviours (minimum purchase volume and most-favoured-nation clauses in this case), if designed for anticompetitive motives and leading to de facto effects of locking most of customers’ needs (60% to 80% in this case), could also be treated as exclusive dealing. Therefore, for e-commerce sites that do not impose outright bans against non-compliant merchants but rather use various other disciplinary measures, the disguised “choose one from two” can still constitute exclusive dealing provided that they are with anticompetitive objects and can achieve anticompetitive results.
Besides, exclusive dealing is not illegal per se, but can be excused by business justifications. According to the implementing rules promulgated by SAMR, such justifications could include product safety, intellectual property protection, transaction-specific investment protection, etc. Based on this, some scholars try to make a distinction between outright bans and manipulation of search results. For the latter, they suggest that e-commerce platforms have to choose which brands to promote and to direct site traffic, therefore it is natural for them to prioritise those merchants that exclusively run stores on their own platform. The direction of traffic amounts to transaction-specific investment that deserves to be protected. Such business reasons make the analysis of “choose one from two” even more complicated.
Other than exclusive dealing, another potential path is to consider refusal to deal. If Alibaba refuses to cooperate with those who run on competing sites, does that amount to a refusal to deal? Refusal to deal is also referred to as the essential facilities doctrine in the US, where the doctrine originates. It requires monopolists with essential facilities to open the facility and allow competitors to use it reasonably. What’s more, in the context of the digital economy, the issue becomes whether the platforms, with their massive data and user bases, are actually essential or replicable, considering the practical possibility as well as economic rationality; and whether it is feasible for them to open such platforms to trading parties and even competitors. However, it is unlikely that the “essentiality” element could be established, again considering characteristics such as multi-homing of users in the digital era and the timeliness of data.
As abuse of a market-dominant position is hard to apply, we may consider vertical non-pricing restraints instead. This circumvents the establishment of market dominance positions so that significant market power would suffice. In addition, the examination of pro-competitive and anticompetitive effects would be close to single-branding or exclusive distribution, as analysed in traditional vertical non-pricing restraints.
In contrast to dominance abuse, “choose one from two” is rarely discussed from this legal perspective. What’s special about vertical non-pricing restraints in China is that the authorities have never looked into cases of this area. In some vertical pricing restraint cases (resale price maintenance, or RPM), it was briefly mentioned that accompanying vertical non-pricing restraints helped strengthen the anticompetitive effects of RPM. However, when it comes to pure vertical non-pricing restraints, there is an enforcement gap. To some extent, it results from the previous structure of enforcement institutions. Before the existing central authority SAMR, investigative power other than merger control is allocated between the National Development and Reform Commission (NDRC) (responsible for price-related monopolistic conducts) and the State Administration of Industry and Commerce (responsible for non-price related monopolistic conducts). It means the NDRC cannot make decisions on non-pricing behaviours when dealing with RPM cases.
But now, with the establishment of SAMR, antitrust enforcement power is unified and the enforcement focus may shift. For example, SAMR recently released the Antitrust Guideline on the Auto Sector, which contains an analysis approach of vertical non-pricing restraints in detail, such as territorial allocation, customer allocation, exclusive supply, etc. However, as a sector-specific guidance, the document actually attracts widespread attention with regard to the compliance of vertical non-pricing restraints. Therefore, we can reasonably anticipate more discussion of “choose one from two” from the perspective of vertical non-pricing restraint.
Instead of giving a direct answer, this article explores different approaches that antitrust authorities may avail of when scrutinising “choose one from two.” It is certainly not without pitfalls, particularly in the challenging area of the digital economy. The good news is that SAMR is looking for opportunities to act and also for changes. Other than the new guidance documents mentioned above, China is also envisioning an overhaul of the AML, the draft of which includes changes to reflect its digital economy reality. With the momentum and potentially new legal tools on the horizon, we may soon see the landscape reshaped.