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“Choosing between two competing platforms” is in the spotlight

In the latest sign of the antitrust enforcement focus on the platform economy sector, on 12 April 2021, the Shanghai Administration for Market Regulation (Shanghai AMR) announced that it had fined Sherpa’s, an online food delivery platform, for abusing its dominant market position. Sherpa’s was accused of forcing restaurants to choose between two competing platforms. This decision follows the largest fine ever imposed by the State Administration for Market Regulation (SAMR), a record RMB 18.2bn (approximately US$2.8bn), for similar practices involving online merchants.

The Shanghai AMR initiated an 18-month investigation against Sherpa’s in June 2019 following complaints. The investigation concluded in December 2020 with a fine of RMB1.17m (approximately US$180,000) amounting to 3 per cent of Sherpa’s 2018 revenue in China.

The key takeaways are set out below:

The long-criticised practice of asking vendors to “choose between two competing platforms” poses significant legal risks for companies. Sherpa’s was the first company to be fined for asking vendors to “choose between two competing platforms” under China’s Anti-Monopoly Law (AML). In February 2021, SAMR fined Vipshop for a similar practice under the Anti-Unfair Competition Law (AUCL), which does not require dominance as a prerequisite to establish an infringement. Similarly, in 2017 and 2018, Zhejiang local authorities fined two food delivery platforms for the same practice under the AUCL or equivalent local regulations.

Both the AUCL and AML provide a legal basis to take action against companies that adopt the “choose between two competing platforms” tactic. SAMR has signaled that it will take a tough stance against this practice regardless of a company’s market position. SAMR emphasised this at an administrative guidance meeting convened by SAMR, the Cyberspace Administration and the State Taxation Administration shortly after the SAMR decision imposing record fines. Thirty-four Internet companies attended the meeting.

The unique features of platforms play a significant role in market definition analyses and market dominance findings. Sherpa’s is an English-language food delivery service platform in Shanghai. The Shanghai AMR recognised the two-sided nature of platforms and defined the relevant market by conducting demand-side substitutability analyses on both sides of the platform. It conducted a detailed SSNIP and quantitative economic analysis, with the assistance of economists. It also employed market surveys to support its substitutability analysis. The analyses conducted highlight the increasing levels of sophistication and reliance on econometric tools at the local level.

To determine Sherpa’s market position, the Shanghai AMR examined the number of users, order volume, the number of listed restaurants and sales revenue and considered the company’s financial and technological strengths, other parties’ reliance on Sherpa’s, and barriers to market entry for competitors.

Fines are calculated based on overall revenue and are not limited to the revenue generated in the relevant market affected by the anti-competitive practice. In the Sherpa’s decision, the fine was calculated based on Sherpa’s annual revenue not just its revenue generated from the affected market. This method of calculating fines is in line with the approach usually adopted by the Chinese antitrust authorities. Given Sherpa’s active cooperation with the investigation and its termination of the illicit conduct shortly after the initiation of the investigation, Sherpa’s was fined a modest 3 per cent of its Chinese revenue for 2018.

It is worth noting that the Shanghai AMR did not confiscate the illegal gains derived by Sherpa’s from the illicit conduct (even though it had the power to do so), given the difficulty in accurately quantifying this.

SAMR and its local branches are determined to crack down on anti-competitive practices in the platform sector. The SAMR and Shanghai AMR cases send a strong signal to the market, i.e., SAMR and its local branches are taking proactive measures to ensure compliance with the AML. At the administrative guidance meeting, SAMR announced it would give companies with a one-month grace period to conduct a self-audit and rectify any misconduct. It also invited companies to publicise their “Commitments to operate in compliance with the law”. The public was also encouraged to help monitor compliance with the commitments. The expectation is that tech companies with a nexus to the platform economy will start conducting audits, if they are not already doing so.

Local antitrust enforcement is expected to increase. In January 2021, China’s finance ministry announced an ‘antitrust fund’ aimed at subsidising local government enforcement. It is worth noting that local authorities from Beijing, Shanghai, Jiangsu, Zhejiang, Guangdong and Shenzhen, home to China’s largest platform companies, attended the administrative guidance meeting.

Stay attuned to vendor, customer, and competitor feedback. Third-party complaints can easily trigger an investigation and SAMR has enlisted public support to monitor conduct in the sector. It is important to be mindful of the reactions of third parties including, but not limited to, vendors, competitors, and customers.