Competition and Antitrust in Internet Markets: Justus Haucap and Torben Stühmeier

9.
Competition and antitrust in Internet markets

Justus Haucap and Torben Stühmeier*
9.1 INTRODUCTION
The rapid rise, enduring growth and success of Internet markets and e-commerce
platforms have spurred a lively and sometimes heated debate among academics and
policy-makers: do Internet markets foster competition or are they prone to concentra-
tion, possibly to the point of monopolization?1 Competition economists and lawyers
vigorously discuss the peculiarities of these markets and whether traditional rules and
interpretations of competition law are sufficient to deal with potential new competi-
tion problems. The cases against search engine Google have received most public and
academic attention (e.g., Devine, 2008; Bork and Sidak, 2012; Haucap and Kehder,
2013; Lao, 2013; Manne and Rinehart, 2013; Lianos and Motchenkova, 2013; Edelman,
2015), closely followed by the e-book case against Apple (e.g., Johnson, 2013; Gaudin
and White, 2014; De los Santos and Wildenbeest, 2014). In addition, numerous cases
concerning vertical restraints in online sales have recently been brought before European
courts (for overviews see Vogel, 2012; OECD, 2013; Buccirossi, 2015; ICN, 2015). These
vertical restraints include across-platform parity agreements (APPAs), which are a special
form of a most-favored customer clause, general bans on online sales or bans on particu-
lar platforms, dual pricing systems, and selective and exclusive distribution systems.
Among competition lawyers, the European Court of Justice’s (ECJ) decision of
13 October 2011 in the Pierre Fabre case has received much attention. In that case the
ECJ ruled that an outright ban on Internet sales constituted a hardcore restriction
under European competition law or, to be more precise, an infringement by object
of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU).
Following this decision, a discussion has emerged on the legal treatment of vertical
restraints in Internet retail markets in general (e.g., OECD, 2013; Bundeskartellamt,
2013). In the USA, in contrast, vertical restraints in Internet commerce have played much
less of a role, reflecting a more lenient approach towards vertical restraints compared
to Europe. Instead, net neutrality has been a much more prominent issue than in most
European countries. Common to the USA and the EU is the high attention paid to the
antitrust proceedings (a) against Google and (b) against Apple in the e-book case.
This chapter will discuss recent antitrust cases related to online markets. Before we
describe and comment on these cases we will very briefly summarize the particularities
of online markets in order to provide a foundation for our analysis. The remainder of the
chapter is organized as follows: section 9.2 describes the unique economic characteristics
of online markets, before section 9.3 discusses the antitrust allegations and proceed-
ings against Google. Section 9.4 discusses the most prominent cases related to vertical
restraints, including the Apple e-book case and the ECJ Pierre Fabre case. Section 9.5
highlights competition issues at the infrastructure level, namely margin or price squeez-
ing of incumbent operators vis-à-vis alternative Internet Service Providers (ISPs) and
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184 Handbook on the economics of the Internet
network neutrality. Policy conclusions and further research questions are discussed in the
concluding section 9.6.
9.2 COMPETITION IN ONLINE MARKETS
9.2.1 Key Characteristics of Online Markets
The intensity of competition in Internet markets is often (but not always) influenced by
direct and indirect network effects and switching costs (e.g., Evans and Schmalensee,
2007; Alexandrov et al., 2011). Many Internet markets operate as multi-sided platforms
where a platform operator brings (at least) two different groups of customers together,
for example, buyers and sellers or ‘users’ and advertisers. A market is typically called two-
sided or even multi-sided if indirect network effects are of major importance (Rochet and
Tirole, 2003, 2006; Wright, 2004; Armstrong, 2006; Evans, 2009; Rysman, 2009). Indirect
network effects need to be distinguished from direct network effects which are directly
related to the size of a network. Put differently, direct network effects imply that a user’s
utility from a particular service is directly affected by the number of other users (Rohlfs,
1974; Farrell and Saloner, 1985; Katz and Shapiro, 1985). The classical example is the
telecommunication network. For example, as the user base of communications services
such as Skype or WhatsApp grows they become more attractive by offering even more
communication links with others. Similarly, if a large customer base is already using a
certain social network such as Facebook or LinkedIn this tends to attract even more users
to join, as a large customer base increases the probability of finding valuable contacts.
In contrast, indirect network effects arise if the number of users on one side of the
market attracts more users on the other market side. Hence, users on one side of the
market do not directly benefit from an increase in the number of users on their market
side, but only indirectly, as an increase in users on their market side attracts more poten-
tial transaction partners on the other market side. While there is no direct benefit of an
increase in users on the same market side (in fact there may even be negative direct effects
via increased competition), the network effect unfolds indirectly through the opposite
market side. Taking eBay or Amazon Marketplace as an illustration, more potential
buyers attract more sellers to offer goods on these platforms as (1) the likelihood of
selling their goods increases with the number of potential buyers and (2) competition
among buyers of the goods will be more intense and, therefore, auction revenues are
likely to be higher (Rochet and Tirole, 2003, 2006; Ellison and Ellison, 2005; Evans
and Schmalensee, 2007). A higher number of sellers and an increased variety of goods
offered, in turn, make the trading platform more attractive for potential buyers. With
positive indirect network effects, more participants on one side of the market imply
higher utility of participants on the other side of the market and vice versa. These indi-
rect network effects are a key characteristic of two-sided markets. While these indirect
network effects have always been present in market places such as fairs, exchanges and
malls, capacity constraints and transport costs or travel times have limited the expansion
of market places. In contrast, in online markets such constraints play virtually no role so
that further concentration processes can be expected. The so-called ‘death of distance’
removes the natural barrier to expansion imposed by travel costs on traditional market

Competition and antitrust in Internet markets 185
places, while the virtual location on the Internet removes the barrier to expansion tradi-
tionally imposed on malls, fairs, and so on by space or capacity constraints.
Apart from eBay and Amazon Marketplace, prominent online platforms that exhibit
indirect network effects are Uber, Lyft and similar ride-sharing platforms; Airbnb,
Expedia, Booking.com and other travel-related booking platforms; Google, Bing, and
other search engines; Craigslist, file-sharing networks and many other platforms and
applications.
From a competition policy point of view, it is important to note that network effects
often require large platform sizes to achieve efficient utilization of the platform. Hence,
high concentration levels cannot simply be interpreted in the same manner as in conven-
tional markets without network effects (e.g., Wright, 2004; Alexandrov et al., 2011; Evans
and Schmalensee, 2015). In fact, the existence of one large market place may often be
efficient, as it helps to reduce search costs for potential trading partners compared to a
situation with a larger number of smaller market places.
From a business perspective, two-sided markets pose the challenge that it is not suf-
ficient for the platform operator to convince only users of one market side to join the
platform, as there is an interrelationship between the user groups on both market sides.
Neither the buyer side nor the seller side of the market can be attracted to join the plat-
form if the other side of the market is not sufficiently large. This is a realization of the
well-known chicken-and-egg problem, where both sides of the market affect each other
and no side can emerge without the other (Caillaud and Jullien, 2003). Consequently
one side of the market is often ‘subsidized’ by the other (Wright, 2004; Parker and
Van Alstyne, 2005). Products such as the Acrobat Reader, Microsoft’s MediaPlayer, or
the RealPlayer are available free of charge for consumers, as is searching with search
engines and shopping on online trading platforms. These services are ‘subsidized’ by the
market side that is less price sensitive than the other (see, e.g., Wright, 2004; Rysman,
2009; Kaiser and Wright, 2006; Weyl, 2010). As a result, platform operators generate
most of their profits on the market side with the lower price elasticity of demand.
9.2.2 Concentration of Online Markets
As a consequence of indirect network effects platform markets may be more concen-

trated than other industries. However, this does not imply that every digital platform
market is automatically highly concentrated (see, e.g., Haucap and Heimeshoff, 2014).
Counter-examples are online real-estate brokers, travel agents, and many online dating
sites, where several competing platforms (still) co-exist. Hence, the presence of indirect
network effects is by no means sufficient for a monopoly or even high levels of market
concentration to emerge. Moreover, competition between several platforms is not nec-
essarily welfare enhancing when compared to monopolistic market structures. While,
generally speaking, competition between several firms is almost always beneficial in
‘traditional’ markets (as long as the particular market under consideration is not charac-
terized by natural monopoly conditions), this general wisdom does not always hold for
two-sided markets.
Even if multiple platforms are not associated with a duplication of fixed costs,
the existence of multiple platforms may not be efficient due to the presence of indi-
rect network effects. As Caillaud and Jullien (2003) and Jullien (2006) have shown, a

Table 9.1 Determinants of concentration in two-sided markets
Driving Force Effect on Concentration

Strength of indirect network effects +
Degree of economies of scale +
Capacity constraints −
Scope of platform differentiation −
Multi-homing opportunities −
Source: Evans and Schmalensee (2008).
monopoly platform can be efficient because network effects are maximized when all
agents manage to coordinate over a single platform. Hence, strong network effects can
easily lead to highly concentrated market structures, but strong network effects also tend
to make these highly concentrated market structures efficient (see Weyl, 2010; Chandra
and Collard-Wexler, 2009). In contrast, capacity constraints (and the associated risk of
platform overload), heterogeneous preferences (and the resulting potential for platform
differentiation) and users’ ‘multi-homing’ (i.e., the opportunity to participate in several
platforms at the same time) tend to drive competition in digital markets. It is therefore
not only unclear how market concentration and consumer welfare are related in these
platform markets, but also whether the market is quasi-naturally converging towards a
monopoly structure. Evans and Schmalensee (2008) have identified five driving forces
that determine the concentration process and level in two-sided markets (Table 9.1).
It is relatively straightforward and immediately plausible that indirect network effects
and economies of scale lead to increasing concentration. But it is difficult to draw general
conclusions as to how indirect network effects influence market concentration, as their
strength varies from platform to platform. The second driver of concentration is econo-
mies of scale, which are often the outcome of the cost conditions of online businesses.
Many two-sided markets are characterized by a cost structure that combines a relatively
high share of (fixed) set-up and maintenance costs with a relatively low share of vari-
able costs (e.g., Jullien, 2006). For companies such as eBay, Expedia, and Booking.com
most of the costs arise from managing the respective databases, while additional transac-
tions within the capacity constraints of the databases cause very low additional costs.
Increasing returns to scale are, therefore, not unusual, but rather typical for two-sided
markets in the online world. While network effects and economies of scale both have a
positive effect on market concentration levels, there are also three countervailing forces
that facilitate market competition.
One important countervailing force is capacity constraints. While in offline two-sided
markets such as shopping centers, trade fairs and nightclubs space is physically limited,2
this does not necessarily hold for digital two-sided markets. However, advertising space
is often restricted, since too much advertising is often perceived as a nuisance by users
(e.g., Becker and Murphy, 1993; Bagwell, 2007) and therefore decreases the platform’s
value in the recipients’ eyes.3 In electronic two-sided markets, like online auction plat-
forms or dating sites, capacity limits can also emerge as a result of negative externalities
caused by additional users. If additional users make the group more heterogeneous,
users’ search costs may increase. In contrast, the more homogeneous the users are, the

higher a given platform’s value for the demand side. If, for example, only certain types
of people visit a particular platform (some platforms are, for example, mainly visited by
women, golf players, or academics), targeted advertising is much easier. Also note that
some dating sites advertise that they only represent a certain group of clients (e.g., only
academics). This reduces the search costs for all visitors. Additional users would make
the user group more heterogeneous and would not necessarily add value, as increased
heterogeneity increases the search cost for other users.
Directly related to the platforms’ heterogeneity is the degree of product differentia-
tion between platforms. For dating sites, magazines, and newspapers it is almost always
evident that consumer preferences are heterogeneous, so some product differentiation
emerges. Such differentiation can be vertical (e.g., high-income users may be more
interesting for the advertising industry than a low-income audience) and horizontal
(e.g., people interested in sailing, people interested in golf).
The higher the degree of heterogeneity among potential users and the easier it is for
platforms to differentiate, the greater the diversity of platforms that will emerge in the
marketplace and the lower the level of market concentration. The finding that increas-
ing returns to scale foster market concentration while product differentiation and het-
erogeneity of user preferences work in the opposite direction is well known from other
markets (e.g., Dixit and Stiglitz, 1977; Krugman, 1980). On two-sided markets increas-
ing concentration will be driven by indirect network effects, but capacity limits, product
differentiation, and the potential for multi-homing (i.e., the parallel usage of different
platforms) will decrease concentration levels. How easy it is for consumers to multi-home
depends, among other things, on (1) switching costs (if they exist) between platforms and
(2) whether usage-based tariffs or positive flat rates are charged on the platform.
To illustrate this idea, consider online travel agencies such as Expedia. Switching from
one online travel agency to another is usually associated with relatively low switching
costs. Multi-homing is also simple, as travelers can easily search for flights, hotels, and so
on, over more than one platform before actually booking. Likewise, airlines, hotels, and
so forth, can easily be listed on more than one platform. With respect to search engines,
users can also easily and without major costs switch away from Google to another general
search engine such as Bing or even to specialized searches over Amazon, TripAdvisor,
social networks (for people), library catalogs, travel sites, restaurant guides and so on if a
switch appears to be attractive. In contrast, switching costs between social networks such
as Facebook are generally much higher because of strong direct network effects and the
effort needed to coordinate user groups. While there are no significant direct network
effects for Google (i.e., it does not directly matter how many other people use Google)
this is not true for social networks, such as Facebook, where the number of users is a
very important factor for users’ utility. Still, entry into the search engine business is not
easy, due to the indirect network effects described above and the economies of scale that
are (1) at least partly based on learning effects, which depend on the cumulative number
of searches made over the network in the past, and (2) caused by substantial fixed costs
of the technical infrastructure that result in decreasing average costs over a wide output
range.
There is another form of switching cost on platforms such as eBay or Airbnb, where,
apart from indirect network effects, the user’s reputation is also highly relevant (e.g., Melnik
and Alm, 2002; Bajari and Hortaçsu, 2004). As a user’s reputation is a function of the

number of transactions already conducted over the platform, it is typically platform

specific (e.g., for eBay), so that changing platforms involves high switching costs, as it
is difficult, if not impossible, to transfer one’s reputation from one platform to another.
9.2.3 Market Definition for Platform Markets
Having discussed the determinants of concentration in two-sided markets, let us now

discuss the peculiarities of defining markets for platform services, as the delineation of
the relevant product market is typically the first step in any antitrust proceeding. Market
definition concepts are based on actual and potential substitution patterns in order to
determine the products and companies that actually or potentially compete with each
other. The market definition process aims at revealing the products and companies that
are likely to be affected by, for instance, a merger or an abuse of market power. A popular
approach in the academic literature is the small but significant non-transitory increase in
price (SSNIP) test. If a firm was (hypothetically) in the position to profitably and sustain-
ably raise its price by 5 to 10 percent above the competitive price level, it is considered
not to be effectively constrained by competition. If, in contrast, such a price increase is
unprofitable, for example, because consumers switch to alternative products that they
consider to be sufficiently good substitutes, these alternative products are considered to
belong to the same product market. Hence, if a 5–10 percent price increase is estimated
to be unprofitable there must be other products or firms in the relevant product market.
In online markets, this market definition process becomes much more complicated for
two reasons. First, in many online markets consumers do not pay a positive price, at least
not in monetary terms. Instead, consumers pay an implicit price in the form of personal
data and/or attention (see Evans, 2013). Platforms compete for consumers’ data and their
attention in order to sell it to advertisers (tailor-made based on personal data). Clearly,
the SSNIP test scenario of a 5–10 percent price increase cannot be computed as long as
the starting price (in money) is zero. Even if one were to consider a 5–10 percent increase
in the implicit price that consumers pay, namely their disclosure of personal data and/
or their exposure to advertising, it is unclear what such an increase of advertising expo-
sure or data disclosure would mean in practical terms and how it could be measured in
a meaningful way. This highly relevant practical problem of defining two-sided markets
has thus far been largely ignored in the literature.
More attention has been paid to a second problem in defining two-sided markets,
namely that the profitability of a price increase on one side of the market also depends
on user reactions on the other side and the feedback effects induced as a consequence
of the indirect network effects. As Evans (2003, p. 325) has pointed out, in two-sided
markets ‘market definition and market power analyses that focus on a single side will
lead to analytical errors’. A price increase on one side of the market cannot be analyzed
in isolation from the other side, as such separate treatment may define the relevant
market too narrowly. A price increase that may be profitable on one side of the market –
if looked at in isolation – may no longer be profitable once user reactions on the other
market side are accounted for. To provide a simple example: it may appear profitable
for an online shopping platform to increase the commission charged to the sellers listed
if the additional revenues generated from the price increase exceed the loss in revenues
that results from some sellers leaving the platform. However, having fewer listed sellers

reduces the platform’s value for buyers, so they may switch to a different online platform,
in turn reducing the value of the platform for sellers. In total, the price increase may thus
be unprofitable once feedback effects are accounted for, highlighting the importance of
defining the market more broadly.
The two-sided market structure causes another problem for competition authori-
ties. Since a platform sets prices (explicit or implicit) to at least two customer groups
(e.g., advertisers and users) it is not clear which price(s) should hypothetically be
increased in a market definition exercise. Should only the price on one market side be
increased or all prices simultaneously? This problem is especially severe in situations with
asymmetric substitution patterns. Advertisers may regard platforms as closer substitutes
than users and may respond to a price increase for advertising more quickly than the user
side. An alternative approach to market definition may be to predict how a price increase
on either side will impact on the platform’s transaction volume.
Argentesi and Filistrucchi (2007) and Filistrucchi et al. (2014) discuss the applicabil-
ity of the SSNIP test in two-sided markets and propose modifying the test.4 In order to
measure market power, it is necessary to compute price–cost margins while taking into
account its two-sided nature. For instance, on online news pages the publisher’s optimal
behavior depends on four different elasticities: the elasticity of readers’ demand with
respect to the price to access an article; the elasticity of readers’ demand with respect to
the quantity of advertising; the elasticity of advertising demand with respect to adver-
tising prices (which are typically charged on a pay-per-click basis); and the elasticity of
advertising demand with respect to the click conversion rate. In order to compute the
price structure an empirical model has to include demand estimations on all sides of the
markets taking interactions between the sides into account. This puts high requirements
on the amount and detail of data needed and on the estimation techniques.
While the interrelatedness of the markets may, in theory, be resolved via more complex
versions of the SSNIP test, data needs put practical limits on its use. Even more chal-
lenging is the fact that many Internet platforms are (seemingly) free for users, so that a
5–10 percent price increase can often not be calculated, as users do not pay with money,
but with their data and their attention to the advertising shown. It is difficult to opera-
tionalize a hypothetical 5–10 percent increase of data disclosure requirements in practice
(even though the issue may be examined theoretically if the simplifying assumptions that
users are homogeneous and hold the same valuation for privacy are accepted). The value
of personal data or privacy varies heavily in terms of monetary equivalents between
users (e.g., Bendorf et al., 2015). Moreover, even a theoretical solution is unlikely to work
in practice for antitrust agencies, given the enormous data requirements. Some relief
may come from surveys about hypothetical consumer reactions and conjoint analysis
techniques. Their major drawback, however, is that they use stated rather than revealed
preferences and are therefore less reliable than data on observed consumer behavior.
9.3 COMPETITION AMONG SEARCH ENGINES AND THE

ANTITRUST CASE AGAINST GOOGLE
Search engines such as Google or Bing are multi-billion-dollar businesses. At the same
time, the market for online search is highly concentrated around the globe. While Google

is the clear market leader in virtually all Western countries, Baidu in China, Yandex in
Russia and to a lesser degree Yahoo! in Japan have dominant positions in these countries.
In all of these markets, we observe a highly concentrated structure with a monopoly or at
best a duopoly (in Japan) emerging. These high concentration levels are an outcome of
the economies of scale as well as network effects that characterize search engines.
However, while it appears to be relatively easy to understand that large customer bases
may be more attractive for advertising companies, this becomes less clear on second sight.
If online advertising is charged on a pay-per-click basis, an online site that induces 10 000
clicks may be as attractive as ten smaller sites that induce 1000 clicks each (see Manne
and Wright, 2011). Nevertheless, large search engines may still be more attractive than
smaller ones, as (1) there can be a fixed cost per web page associated with monitoring
advertising campaigns and (2) larger search engines may be better able to place targeted
advertising, as they have access to a larger base of historical search data and past ‘clicking
behavior’. These two features can make larger search engines more attractive than smaller
ones. In addition, Google has traditionally created (by means of contract) some artificial
incompatibility between advertising campaigns on Google and other search engines, but
this incompatibility issue has been largely resolved following investigations by the Federal
Trade Commission (see FTC, 2013). Furthermore, since space is limited on web pages, a
given web page that induces 10 000 clicks for a given ad generates more revenue per page
than a page that only induces 1000 clicks. Given the largely fixed-cost nature of online
content provision, the resulting economies of scale can induce market concentration.
It is much less clear, however, how important a search engine’s size is for search engine
users. While it is plausible that access to a large set of (historical) search data and con-
sumer clicking behavior is beneficial to improve an engine’s search results, there is some
debate about how much data are needed to further refine the search mechanism before
the marginal benefit of additional data exceeds the additional cost of processing it (see
Manne and Wright, 2011). In fact, the literature is divided about whether it is Google’s
sheer size that allows it to maintain its market position (e.g., Pollock, 2010; Crane, 2012)
or whether it is its superior innovation (see Manne and Wright, 2011; Bork and Sidak,
2012). Overall, it appears that Google’s superior ability to place advertising, based on its
analysis of large datasets of customer clicking behavior, and the fixed cost of placing and
monitoring advertising, gives rise to indirect network effects from users to advertisers,
which ultimately makes Google a two-sided market.5
In any case, switching costs between search engines are very modest for consumers, as
the past has shown. When Google entered the market in 1998, Altavista was the leading
search engine with Yahoo! closely following in second place in Western countries. Still
Google managed not only to enter the market, but also to offer superior quality so that
it even leapfrogged its competitors. Similarly, Rambler was the leading Russian search
engine in the late 1990s before Yandex surpassed it. Many commentators therefore
suggest that Google’s success is also a result of its superior quality (e.g., Evans, 2008;
Devine, 2008; Argenton and Prüfer, 2012).
Overall, the quality of search engines can be approximated by ‘expected time a user
needs to obtain a satisfactory result’. The time needed to find a satisfactory result in
turn depends on several factors (Argenton and Prüfer, 2012), including search algorithm
quality, hardware quality, and data quality, where data quality refers both to data freely
available on the Internet and search engine–specific data that has been collected during

previous search processes. In principle, the availability of hardware and Internet data
should not differ between competitors, especially given the substantial financial resources
available to companies such as Microsoft, Google and also Facebook, for which access
to sufficient financial resources should be taken as given. It is argued that the main com-
petition problem for those companies is the limited availability of high-quality search
data that are company specific (ibid.). Due to its significant market share Google also
has the best access to (also historical) search data and consumer clicking behavior. This
is an important aspect for success in search engine markets, as search data are needed to
refine the engines’ search algorithms. The more search data an operator has, the better
are the refinements of its search algorithm. In principle this process results in supe-
rior search engine quality and provides a competitive advantage for the market leader,
Google. It is unclear, however, at which point or data quantity the marginal benefit of
utilizing additional data exceeds the marginal cost of additional processing capacity. As
some authors such as Manne and Wright (2011) argue, this point where the marginal cost
exceeds the marginal benefit has not only been passed by Google, but also by other large
search engines such as Yahoo! and Bing. In fact, it appears that most search engines only
use subsets of their search data to further improve the search algorithm and not all their
available data.
While the existence of a superior search engine is, of course, not a policy concern for
competition authorities in itself, there have also been numerous complaints that Google
abuses its dominant position, especially to favor its own subsidiaries (such as Google
Maps, YouTube or Google Shopping) over competing platforms. More precisely the alle-
gation is that Google biases its search results so that links to its own subsidiaries appear
ahead of links to rival sites even though a rival’s site may be a better fit for what the user
is searching for. This search bias allegation (e.g., Goldman, 2006; Crane, 2011; Edelman,
2011; Ammori and Pelican, 2012) has – by and large – been the key to the antitrust inves-
tigations against Google (see FTC, 2013; European Commission, 2015), even though the
European Commission’s allegation is slightly different in that it also objects to Google
advertising its own services, in particular Google Shopping, ‘too prominently’.
In addition, other allegations have concerned Google’s (unlicensed) use of content
generated by competing specialized search engines (so-called vertical search engines) as
well as the strategic incompatibility that Google introduced for third parties between
advertising campaigns on Google platforms and other web pages. Both issues have
largely been resolved through commitments accepted by the Federal Trade Commission
(FTC, 2013) in January 2013. A fourth antitrust investigation concerns the exclusive or
default contracts Google has used to incentivize mobile handset manufacturers (through
exclusive contracts, rebates or potentially predatory prices) to use Google’s Android
operating system and Google as the default search engine (see, e.g., Manne and Wright,
2011; Bork and Sidak, 2012). Whether these contracts give rise to market foreclosure is,
at the time of writing in 2015, being investigated by the European Commission and other
competition agencies.
Regarding the most prominent allegation of search bias, in January 2013 the Federal
Trade Commission (FTC, 2013) decided not to initiate formal proceedings. In contrast,
after more than five years of investigation and analysis (which started in early 2010)
and following a lengthy discussion of various commitments that Google had offered
to undertake in order to mitigate the alleged search bias problem, in April 2015 the

European Commission issued a formal statement of objections (SO) against Google. The
SO outlines the European Commission’s preliminary view that Google is:
[. . .] abusing a dominant position, in breach of EU antitrust rules, by systematically favoring its
own comparison shopping product in its general search results pages in the European Economic
Area (EEA). The Commission is concerned that users do not necessarily see the most relevant
results in response to queries – to the detriment of consumers and rival comparison shopping
services, as well as stifling innovation. (European Commission, 2015)
More specifically, the Commission’s main preliminary conclusions are that (1) ‘Google
systematically positions and prominently displays its comparison shopping service in
its general search results pages, irrespective of its merits’; (2) ‘Google does not apply to
its own comparison shopping service the system of penalties, which it applies to other
comparison shopping services on the basis of defined parameters, and which can lead to
the lowering of the rank in which they appear in Google’s general search results pages’;
and that (3) ‘Google’s conduct has a negative impact on consumers and innovation. It
means that users do not necessarily see the most relevant comparison shopping results in
response to their queries, and that incentives to innovate from rivals are lowered as they
know that however good their product, they will not benefit from the same prominence
as Google’s product’. The SO suggests that:
Google should treat its own comparison shopping service and those of rivals in the same way.
This would not interfere with either the algorithms Google applies or how it designs its search
results pages. It would, however, mean that when Google shows comparison shopping services
in response to a user’s query, the most relevant service or services would be selected to appear in
Google’s search results pages. (European Commission, 2015)
In addition, further proceedings are underway at US state level as well as in India,

Argentina and South Korea.
Whether Google has in fact biased its search results in favor of its own subsidiaries is
difficult to determine from the outside, as Google’s search algorithm is naturally a busi-
ness secret. Moreover, personalized search results (based on one’s own search history and
one’s cookies) imply that different individuals may obtain different search results for the
same keyword search. Bork and Sidak (2012) furthermore argue that Google’s incentives
to bias search results are limited, as users could easily switch to another search engine
that may provide better (and less biased results), given that switching costs are low and
multi-homing easy in case of search engines. As Bracha and Pasquale (2008) correctly
point out, though, this implies that consumers notice that they are shown biased results –
something not very likely given that consumers are searching for something they do not
know where to find. Given that searching is becoming more and more personalized and
that Google’s estimate of what results consumers may want to see in which order may
only be an (informed) opinion (see Grimmelmann, 2011), it is by no means easy to estab-
lish a search bias (e.g., Edelman and Lockwood, 2011) or to design appropriate remedies.
The European Commission’s statement of objection also reveals how difficult it is to
delineate the relevant product market. While the European Commission defines a distinct
product market for general search, it is far from clear how consumers would substitute if
Google were to charge for search requests. While some users may switch to other general
search engines, other users may use Wikipedia, Amazon, IMDb, LinkedIn, Twitter and

other websites with search functions for their searches for general information, books,
movies, people and so on. In fact, the Commission appears to hold the view that users
search for specific web pages, while one may also argue that users rather search for
information. In its market delineation the Commission therefore exclusively focuses on
technical aspects (how and which websites are crawled and listed), but does not analyze
consumer behavior. Hence, it is completely unclear whether the Commission’s market
delineation is appropriate or not. Similarly, the Commission argues that comparison
shopping services constitute a different product market from specialized search services,
online retailers, and merchant platforms/market places. Again, the Commission bases
its view entirely on technical and functional aspects, arguing that comparison shopping
services constitute a market in their own right, since consumers cannot directly purchase
the product from these sites. This means, of course, that Google shopping would belong
to a different and more competitive market, if Google were to include one-click-purchase
options in its ads. From an economic perspective, this is not immediately plausible, as a
further vertical integration would imply that Google is no longer dominant with regard
to eBay and Amazon. Again, user behavior has not been analyzed to delineate the
market, which is somewhat troublesome.
In addition, the European Commission’s statement of objections appears to suggest
that, in the absence of an objective justification, discrimination and favoring one’s
own services is abusive by its very nature for dominant companies. Alternatively, the
Commission may hold the view that Google Shopping is an essential facility or bottle-
neck for online retailers, even though the Commission does not use the term. In any case,
given the presence of numerous market places such as eBay and Amazon, the view may
be difficult to sustain.
Finally, the Commission argues that the success and growth of Google’s services do
not reflect its relative quality and attractiveness for users. The statement of objections
suggests that Google’s success is not the outcome of competition on the merits, although
little evidence is provided to substantiate this claim. Given these shortcomings, an inter-
esting question – also from a political economy of antitrust perspective – is why the
Commission chose Google Shopping as its showcase and not any of the other services
for which market definition may be much less contentious. For now, it is interesting to see
how the case will evolve.
Even ignoring the practical problems of proving potential abuse, the next question
concerns potential remedies to prevent any anticompetitive search biases in the future.
A number of scholars have suggested mandating search neutrality (e.g., Pollock, 2010;
Edelman, 2011; Ammori and Pelican, 2012; Crane, 2012; Manne and Wright, 2012). As
has been pointed out though, search neutrality is, first of all, difficult to operational-
ize and, second, may inhibit further innovation, thereby harming consumers in the end
(see Grimmelmann, 2011; Bork and Sidak, 2012; Crane, 2012). As a consequence, some
policy-makers have proposed to unbundle or separate Google’s search business from its
content business. However, consequences for innovation and consumers may be even
more adverse than with search neutrality requirements, as unbundling would imply that
search engines would no longer be allowed to answer questions themselves, but only
provide links to answers. Moreover, an unbundling remedy would become completely
untenable in other cases as, for example, Amazon may also be considered the largest
search engine for books. Obviously, unbundling does not make any sense here. Given that

many websites have search functions and may be considered search markets, unbundling
requirements become highly problematic.
Another suggestion has been to require Google to reveal its search algorithm, but
such a measure would appear disproportionate, as has been argued in the literature,
as it concerns the heart of Google’s business and the main element of competitive
rivalry (e.g., Argenton and Prüfer, 2012; Bork and Sidak, 2012). Others have proposed
regulating Google’s search algorithm and changes in it. However, practically, this is not
without problems either. For example, Google changed its algorithm 665 times in 2012
alone.6 Consequently, there is a risk that regulation will either be too slow or even retard
innovation.
Instead, Argenton and Prüfer (2012) have suggested that Google should be required
to share its specific search engine data to foster competition in search engine markets.
This suggestion is based on the assumption that it is very difficult for competing search
engines to catch up or even overtake Google, due to their lack of online search data to
develop better search engine algorithms. Hence access to (historical) search data may help
to enable Google’s competitors to develop better search algorithms, thereby increasing
competitive pressures in the market for search engines.
Another option, which is more light-handed, would be to mandate that Google colors
the background or the links to its own subsidiaries in a manner similar to sponsored
links. Once consumers clearly realize that some search results point to Google websites
or services, they can better evaluate the quality of the results and, if they are not satis-
fied, switch to some other search engine. Increased transparency should resolve most of
the problems associated with any potential discriminatory search bias in vertical search.7
The European Commission has been in discussions with Google since 2011 on how
the concerns can be alleviated through binding commitments. In 2014,8 Google proposed
a threefold remedy for its current and future specialized services. First, users would be
informed by a label indicating Google’s own services. Second, Google services would
be graphically separated from general search results. Third, Google would prominently
display three links to three rival specialized search services in a format that is visu-
ally comparable to that of links to its own services. Joaquín Almunia, then European
Commissioner for Competition, stated that the objective of the Commission is not to
interfere in Google’s search algorithm but to ensure that rivals can compete fairly with
Google. The Commission, at that time, stated that the concessions ‘are far-reaching and
have the clear potential to restore a level playing-field in the important markets of online
search and advertising’.9 However, with the change of Commissioners, following the
appointment of the new Commission in 2014, the European Commission has changed its
view and issued the statement of objections, mentioned above.
9.4 VERTICAL RESTRAINTS IN INTERNET COMMERCE
Apart from the highly visible and hotly debated Google cases, there have been numerous
cases in Europe regarding the use of vertical restraints in online markets. The develop-
ment of the Internet as a powerful channel for the distribution of goods and services has
created new platforms and sellers such as eBay, Amazon, Expedia, Booking.com and so
on. The most common vertical restraints in online commerce are the following:

● general bans on online sales by manufacturers;

● agreements limiting the absolute quantity or percentage of online sales;
● dual pricing strategies with higher wholesale prices for online sales and lower
wholesale prices for offline sales;
● selective distribution schemes; and
● across-platforms parity agreements (APPAs).
The most common restraint is probably the complete or partial restriction of online
sales. One of the earliest cases was Yves Saint Laurent perfume. In this instance, in 2001
the European Commission approved that online sales could be restricted to retailers
who were already operating brick-and-mortar stores.10 The Commission recognized that
certain products cannot be properly supplied without specialized distributors, especially
if the product’s quality needs to be preserved or its proper use ensured.
The French competition authority reached a very similar conclusion in 2006 and
2007, as did the appeals court, when a pure online retailer (Bijourama) wanted to enter
the Festina France selective distribution system in the market for (expensive) watches.
The authority and the court stressed that a manufacturer with a market share below
30 percent can limit online sales as long as the criteria are transparent and used con-
sistently. Hence, the exclusion of a purely online dealer was ruled to be legal. A similar
decision was reached in 2007 regarding several selective distribution systems for high-end
cosmetics and hygiene products (Bioderma).
In 2002, a Belgian court ruled that even the complete ban on online sales that Makro
imposed on its selective distribution networks of luxury perfumes and cosmetics was
legal, because the products’ nature required personal expert guidance and the sales
methods could not be replicated over the Internet.
The most prominent case was the Pierre Fabre ruling, where in 2009 the European
Court of Justice ruled that a de facto ban on online sales (through the requirement
of a qualified pharmacist to assist the sale) should be regarded as an infringement ‘by
object’ of Article 101(1) TFEU. Put differently, the ban on Internet sales is regarded as
a hardcore restriction, even though the Paris court to which the case was referred noted
Pierre Fabre’s 20 percent market share and the lively inter-brand competition.
There are several other cases dealing with selective distribution systems, some of which
are summarized in Buccirossi (2013, 2015), Dolmans and Leyden (2012), Vogel (2012),
ICN (2015) and Dolmans and Mostyn (2015). In principle, European competition
authorities tend to take a rather strict view, focusing on the protection of intra-brand
competition without much analysis of the degree of inter-brand competition and the
economic effects on consumers and the competitive process as such.
This is also reflected in proceedings against various companies for engaging in
dual pricing. Dual pricing means that retailers are granted different wholesale prices
depending on whether they intend to sell the product online or over the counter. While
wholesale price discrimination between different retailers and different retail channels is
perfectly in line with naive profit maximization in all but perfectly competitive industries,
European competition authorities have – in contrast to the USA – viewed this pricing
practice with great skepticism when applied to Internet commerce. For example, Bosch
Siemens Home Appliances (BSH) introduced a new rebate system in 2013 with lower
performance rebates for online sales. BSH argued that different rebate levels were aimed

at compensating brick-and-mortar dealers and sales for their high-quality sales services
in comparison with online dealers. However, the German Cartel Office took the view
that lower rebates for online sales create incentives for hybrid dealers to sell less online,
which reduces competition through online sales and is therefore without further analysis
anticompetitive. The German Cartel Office also suggested that BSH should compensate
brick-and-mortar sales through fixed payments, thereby largely ignoring the lack of
incentive effects that fixed lump-sum payments have.
From an economic perspective the great attention paid to intra-brand competition
is misguided, as long as there is active inter-brand competition. Moreover, it is unclear
why excluding the Internet as a distribution channel should be considered a hardcore
restriction. Many cases concern status products such as watches, perfumes, cosmetics
and similarly expensive products. In these instances, consumers may actually purchase
the product because of its (expensive) brand image. If online sales destroy the expensive
image of the product, this may obviously harm the manufacturer, but also many consum-
ers themselves, who buy status products exactly because they are expensive. However,
given the current approach in Europe, it appears to be extremely onerous to prove such
a case.
Dual pricing schemes are nothing but a form of price differentiation, which is common
in almost all wholesale markets that are less than perfectly competitive. Prohibiting dual
pricing and disallowing bans on online sales makes it much more difficult for companies to
incentivize brick-and-mortar retailers and presence by which manufacturers can generate
value from window-shopping effects, additional services that can be provided offline and the
easier provision of after-sales services by bricks-and-mortar stores. All these features would
contribute to maintaining a brand’s value, thereby intensifying inter-brand competition.
Furthermore, preventing dual pricing can make manufacturers more reluctant to
offer special discounts for offline sales in regions where a presence may be valued (e.g.,
in order to have a nationwide presence), but retailer profits are lower (e.g., due to lower
demand), as a dual pricing ban in the presence of intense online competition basically
prevents manufacturers from charging different wholesale prices to different retailers.
Consequently, input price differentiation becomes much more difficult, even though
the welfare effects are at best unclear (see Dertwinkel-Kalt et al., 2015, 2016). Hence,
European competition agencies should revisit their overly strict approach to vertical
restraints in the Internet and take a more lenient approach similar to the USA.
A final vertical restriction that has received much attention is across-platforms parity
agreements (APPAs), illustrated in Figure 9.1. APPAs have most famously been used
in the Apple e-book case and for travel and hotel booking platforms. With an APPA, a
booking platform prohibits its content providers (e.g., e-book publishers or hotels) from
offering their products at lower prices on any other platform. The standard theories of
harm are either that this may lead to collusion among the content providers (e.g., pub-
lishers) or a foreclosure of the platform market, as no new platform can enter with lower
prices. Other cases involve Amazon (in Germany and the UK) and motor insurance
providers (in the UK).
Regarding the e-book case, when Apple entered the electronic books industry in 2010
it convinced book publishers (1) to adopt agency agreements under which final e-book
prices are set by publishers, while retailers only receive a commission on every copy sold
(in the case of Apple itself 30 percent), and (2) to adopt an APPA for their e-books that

Source: Buccirossi (2013, p. 22).
Figure 9.1 An across-platforms parity agreement (APPA)
allowed Apple to sell e-books at its competitors’ lowest price. The agency agreements
replaced the previous wholesale agreements that left the retail pricing decision with retail-
ers. Around this time, the retail price of e-books sold by Amazon, the dominant retailer
with a 90 percent market share in 2010, rose by about 18.6 percent on average, and the
price of New York Times bestsellers rose by about 42.7 percent.11
In April 2012, the US Department of Justice (DOJ) brought a case against Apple and
a group of five major publishers for illegally conspiring to raise e-book prices, claiming
that agency agreements played an instrumental role. The DOJ reached a settlement with
the publishers and won the case against Apple. Both the court’s order and the settlement
prohibited further use of agency agreements.
Similar proceedings against Apple and the five publishers were opened in the EU in
December 2011. The European Commission had doubts concerning the companies’
joint switch from the wholesale model, where the e-book retail price is set by the retailer,
to agency contracts that all contained the same key terms for retail prices – including
an APPA, maximum retail price grids and the same 30 percent commission payable to
Apple. The European Commission was particularly concerned ‘that the joint switch
to the agency contracts may have been coordinated between the publishers and Apple,
as part of a common strategy aimed at raising retail prices for e-books or prevent-
ing the introduction of lower retail prices for e-books on a global scale. This would
violate Article 101 of the TFEU that prohibits cartels and restrictive business practices’
(European Commission, 2013). The Commission accepted commitments offered by
Apple and four of the publishers in December 2012, while the fifth publisher settled on
the same conditions in July 2013. The publishers and Apple offered commitments that
contained the following three key provisions:
● Apple and the publishers terminate their then valid agency agreements.
● For a period of two years, the publishers cannot prevent e-book retailers from
setting their own prices for e-books or, from offering discounts and promotions.

● For a period of five years neither the publishers nor Apple can set up agreements
for e-books with retail-price APPAs (see European Commission, 2012).
In its defense Apple had claimed that its introduction of the iPad represented a major
innovation that should be taken into account. Around the time Apple entered the e-book
market it also introduced the iPad, thereby increasing competition in the market for
e-book reading devices. In response, Amazon lowered the price of its reader, the Kindle,
from $299 to $139 (and later even further) and also developed free software allowing its
e-books to be read on the iPad and other devices.
In fact, the evidence on the e-book case is mixed. While De los Santos and Wildenbeest
(2014) show that e-book prices increased following the APPA introduced by Apple,
Gaudin and White (2014) also show that the e-book reader prices (the complementary
asset) have fallen at the same time, making the overall effect less clear. Interestingly
enough though, some European countries such as Germany are now about to introduce
a legal resale price maintenance requirement for e-books.
With respect to hotel booking platforms and online travel agencies (OTAs), several
European authorities have investigated the OTAs’ APPA. Parallel investigations took
place in several countries, including France, Germany, Italy, Sweden and the UK. In
Germany, the Federal Cartel Office concluded that the APPA foreclosed the market
and softened competition in the distinct market for searching, comparing and booking
hotels online, as new entrant platforms would not be able to undercut existing platforms’
hotel rates. While the OTA platforms argued that an APPA was needed to safeguard
their platforms’ investments, as hotels could otherwise free-ride on the platform’s invest-
ment by charging lower prices in own channels, the German Federal Cartel Office did
not accept this argument and ruled that APPAs were anticompetitive and a violation of
competition law.
In contrast, the joint investigation started under the coordination of the European
Commission, in Italy, France and Sweden, concluded in April 2015 with a commitment
by Booking.com to abstain from using a general APPA and use a so-called narrow
APPA (or NAPPA) instead. Under a NAPPA, price parity clauses will only apply to
prices and other conditions publicly offered by the hotels through their own online sales
channels (such as their own website), in order to prevent the most obvious possibility
for free-riding. However, hotels are free to set prices and conditions to other OTAs
and to offline channels. This decision appears to be more balanced than the rather
strict prohibition by the German Cartel Office, especially since the office’s theory of
harm – namely that competition between platforms is not possible between OTAs in the
presence of an APPA – must be called into question when it is noticed that the leading
OTA, called Hotel Reservation Service (HRS), saw its market share reduced from more
than 40 percent to almost exactly 30 percent over a period of two years. Even with
APPAs, competition between platforms could occur through general rebates provided
to users by the platform itself. In general, though, APPAs are an interesting new form
of most-favored-customer clause, where more analysis is needed before robust results
can be used.

9.5 COMPETITION ISSUES AT THE INFRASTRUCTURE

LEVEL
At the infrastructure level two competition issues have received most attention: first,
price- or margin-squeeze cases, where incumbent network providers charge retail
prices for Internet access that make it unsustainable for competitors to operate in the
market, given the incumbent’s retail prices, and second the debate surrounding net
neutrality and the risk that network operators or Internet service providers engage in
price and/or quality discrimination with respect to different content providers or types
of content.
9.5.1 Price and Margin Squeezes in Internet Access Markets
One of the most common allegations in Internet access markets is that vertically inte-
grated incumbent network operators abuse their dominant position by engaging in so-
called price or margin squeezing, that is by strategically lowering retail prices or raising
access prices at the wholesale level in order to constrain reasonably or even equally
efficient downstream competitors. In the academic literature one of the debates has been
about the incentives for regulated companies to engage in price or margin squeezing at
all (see, e.g., Bouckaert and Verboven, 2004). This debate is quite similar to well-known
discussions about the rationality of predatory pricing in unregulated markets (see
Hovenkamp and Hovenkamp, 2009). In principle, the regulated access price at the whole-
sale level reflects the incumbent’s opportunity cost of serving a particular customer.
While the economic logic of a margin squeeze largely resembles that of a predatory
pricing strategy or, alternatively, refusal to deal, there is a lively legal debate as to whether
price and margin squeezes should be treated as a separate competition policy concern or
whether they should be subsumed as a particular case of predatory pricing or refusal to
deal (e.g., Sidak, 2008).
Further policy debates concern the proper efficiency standard that an incumbent has
to adhere to when setting its retails prices: Which competitors need to be able to survive
in the retail market, reasonably efficient operators or only equally efficient operators?
While most economists argue for the equally efficient operator test (e.g., Bouckaert and
Verboven, 2004; Gaudin and Saavedra, 2014), Clerckx and De Muyter (2009) defend
the reasonably efficient competitor standard and emphasize that incumbent network
operators tend to have inherited their positions from a government enterprise or other
forms of protection. Moreover, even though the reasonably efficient competitor test
may lead to productive inefficiency, as it allows for the entry of inefficient competi-
tors, the reasonably efficient competitor standard may alleviate allocative inefficiencies
in imperfectly competitive markets. There is, however, another rather practical objec-
tion, namely that a reasonably efficient competitor standard would require the access
provider to know or correctly guess the retail costs of its competitor to avoid violating
competition law, while the equally efficient operator rule only requires that the access
provider knows the costs of its own retail unit (see also Martin and Vandekerckhove,
2013).
The legal analysis of margin squeeze, furthermore, diverges into two different philoso-
phies: some experts consider margin squeezes as a form of the classical refusal-to-deal

abuse or predatory pricing, whereas others consider margin squeezes as a peculiar form
of abuse warranting separate analysis and remedies.
In Europe, the four most prominent of the numerous price-squeeze cases have been
Deutsche Telekom (2003/2010), Wanadoo (2003), Telefónica (2007) and TeliaSonera
(2011), but there are several other cases in almost all EU member states. For detailed
discussions, see Crocioni and Veljanovski (2003), Fernández Álvarez-Labrador (2006),
Motta and de Streel (2006), Bravo and Siciliani (2007), Polo (2007), Clerckx and
De Muyter (2009), Heimler (2010), Hay and McMahon (2012) as well as Gaudin and
Saavedra (2014).
The general approach in the EU, following the Deutsche Telekom case, is that the
European Commission as well as national competition or regulatory authorities tend to
consider a price squeeze to be abusive per se and liable to prosecution under Article 102
TFEU, regardless of the economic effects on competition and consumers. When the
European Union’s Court of First Instance (CFI) endorsed the Commission’s decision in
the Deutsche Telekom case, it also clarified that an abusive margin squeeze can be dis-
covered through the so-called imputation test. A price squeeze occurs whenever the retail
arm of a vertically integrated operator cannot operate profitably if it had to pay the same
wholesale access prices as its retail competitors. Hence, the ‘equally efficient’ or ‘just as
efficient’ standard is used in the cases mentioned above, even though the Commission has
also shown sympathy to the reasonably efficient standard in other cases.12
The formalistic approach of the imputation test contrasts heavily with the more eco-
nomic or effects-based approach to which the European Commission has moved in other
areas. Interestingly enough, all four cases were decided on grounds of predatory (retail)
pricing, not on grounds of excessive (wholesale) pricing. The alleged margin squeeze did
not result from an excessive wholesale/access price for an essential input (access to the
fixed local loop) but from a retail access price that was considered too low.
The USA follows a rather different approach since Trinko and linkLine. The linkLine
decision concerned four California Internet service providers (ISPs) supplying retail
digital subscriber line (DSL) services. These ISPs purchased wholesale transmission
services from the vertically integrated Pacific Bell (doing business as AT&T), which
itself supplied DSL Internet access to the retail market. In July 2003, the ISPs brought
a private antitrust suit against AT&T alleging that it had monopolized and attempted
to monopolize the regional DSL market in violation of Section 2 of the Sherman Act
in several ways, including the creation of a price squeeze. While the four ISPs prevailed
in the District Court and the Circuit Court of Appeals, the US Supreme Court saw no
need to view price squeeze as a distinct exclusionary strategy for antitrust purposes.13
It decomposed vertical price squeeze into two parts: first, the high wholesale price is an
exercise of monopoly power, and the exercise of lawfully obtained market power does
not violate the Sherman Act Section 2 prohibition of monopolization. Second, the low
retail price only violates the Sherman Act Section 2 prohibition of monopolization if
the price is predatory (see Martin and Vandekerckhove, 2013). Similarly, the Trinko case
has made clear that in the USA, price or margin squeezes are, in contrast to Europe,
dealt with under the refusal-to-deal standard and not seen as an antitrust violation
in their own right.14 As a consequence, Sidak (2008) has proposed abolishing price or
margin squeeze as a distinct theory of antitrust liability under Section 2 of the Sherman
Act.

9.5.2 Net Neutrality
Traditionally, the Internet has developed within a non-discriminatory architecture. All

data packages are treated equally (with so-called ‘best effort’), independent of their
content and origin. Recent technologies, however, enable network providers to distin-
guish and to differentiate and discriminate between different packages. Following the
advent of new traffic management technologies a debate has emerged in policy circles
and in academia – originally only in the USA (see Lessig, 1999; Wu, 2003), but subse-
quently spreading to Europe – on whether the traditional principle of ‘net neutrality’
would need to be secured by means of regulation.
The term net(work) neutrality is not clearly defined and has several meanings. As
Krämer et al. (2013, p. 797) point out, the meaning ‘is often ambiguous and can mean
anything from blocking certain types of undesired or unaffiliated traffic (Wu, 2007), to
termination fees (Lee and Wu, 2009), to offering differentiated services and taking meas-
ures of network management (Hahn and Wallsten, 2006)’.
One of the core elements of net neutrality in any case is the best-effort principle.
As long as network operators do not identify the origins of the various packages,
all packages are obviously treated equally (best-effort rule). In addition, network
operators cannot charge the data sender as long as they do not identify them. This
in turn implies zero prices for sending traffic (zero-pricing rule). Consequently,
similar to the ‘receiving-party-pays’ principle in many telecommunications networks,
data receivers (the typical Internet user) are charged for receiving and accessing
online content, while content providers do not pay network operators for transmis-
sion services. As long as network operators cannot prioritize certain traffic, this
implies non-discriminatory pricing of packages (non-discriminatory pricing rule).
Any departure from one or more of these rules may be considered a violation of
net-neutrality. Focusing on these three distinct rules, Schuett (2010) surveys the net-
neutrality discussion in the economic literature.15 Moreover, van Schewick (2012)
offers an extensive report and framework on net neutrality with a special emphasis
on non-discrimination rules adopted by the Federal Communications Commission
(FCC).
From an antitrust policy perspective, the concept of net neutrality as a non-
discrimination rule is of particular interest. Strict net neutrality then prevents ISPs from
prioritizing any traffic from any origin. Advocates of strict net neutrality fear that any
departure from this rule would induce vertically integrated ISPs to behave in anticompeti-
tive fashion, for example by blocking or discriminating against rivals’ content in terms of
prices and quality of service. ISPs should thus be subject to a prophylactic regulation to
prevent any such behavior right from the start.
We would like to shed light on the incentives of ISPs to engage in such behavior and on
to the consequences for competition and welfare.
9.5.2.1 Blocking and degradation

Vertically integrated ISPs that own the network infrastructure and act, at the same
time, as content providers may have an incentive to degrade the quality of rivals’
content on their network or to entirely block services in order to reduce competition
in the content market and enhance the demand for their own content. The concern is

that ISPs will use their control over the last mile to favor their own proprietary content
over content provided by competitors (see Krämer et al., 2013).
These are common examples of so-called vertical foreclosure practices. According to
Rey and Tirole (2007) foreclosure is a dominant firm’s denial of access to an essential
facility with the intent of extending market power from one segment of the market (the
bottleneck segment) to an adjacent segment (the competitive segment). By treating some
groups of customers preferentially and offering less attractive terms to others, companies
can achieve the same results as a vertically integrated company even without vertically
integrating.
The theoretical findings on vertically integrated firms’ incentives to foreclose rivals
downstream are mixed. Bowman (1957) famously made the argument that there is only
one monopoly rent in any vertical chain of production and, thus, a monopolist in the
upstream market would have no incentive to monopolize the downstream market (and
vice versa). According to the Chicago School’s ‘single-monopoly-rent hypothesis’ a verti-
cally integrated company can only earn a monopoly profit in one of the markets, either
upstream or downstream, but not two separate monopoly rents in both markets. As a
result, a monopolist either has no incentive to vertically integrate in order to leverage its
dominant position from the upstream to its downstream market or, in the case of imper-
fect downstream competition, vertical integration would actually benefit consumers and
increase welfare as it removes the inefficiencies from double marginalization.16 Post-
Chicago economists, however, have shown that the validity of the hypothesis depends,
among other things, on the assumption that market participants have perfect informa-
tion.17 The modern economic literature identifies various circumstances where vertical
foreclosure can be profitable (for an overview see Rey and Tirole, 2007).
In telecommunications markets, there is at least some evidence that ISPs may some-
times foreclose rival services in practice. In the USA, the net neutrality debate evolved in
several steps. First, in 2005, the FCC took action against the Madison River Telephone
Company.18 Madison River Communications, a regional company offering both tel-
ephone and Internet services, blocked ports used for Voice-over-IP (VoIP) services, thus
preventing its subscribers from using third party VoIP services. The FCC regarded this
action as an infringement of principles of an open Internet, first expressed by then
Chairman Michael Powell in 2004, which should generally enable customers to access any
legal content.19 Following the Madison River case, the FCC adopted the Open Internet
Principles in 2005, establishing four consumer rights. However, these principles were
not legally binding but were only a declaratory policy statement by the agency. When,
in 2008, the cable network operator Comcast slowed BitTorrent peer-to-peer traffic in
response to heavy usage by private customers,20 the FCC required Comcast to disclose the
details of its discriminatory network management practices to the Commission within 30
days. In addressing the BitTorrent case, the 2005 Open Internet Principles were applied
but an appeals court overturned the decision. In response, the FCC adopted its 2010
Open Internet Order. This order was subsequently challenged by Verizon and referred
back to the Commission by an appeals court. That court reiterated that the FCC had the
authority to classify and reclassify broadband access services as information or telecom-
munication services (the two major US legal categories), that the agency had the author-
ity to promulgate rules assuring non-discrimination in the Internet, and that there was
concern that broadband access providers might abuse their market power. However, the

court found that the 2010 order had applied common carrier principles to information
service providers. After a lengthy political and legal process and many changes in direc-
tion, the FCC adopted a new order in February 2015, designed around the following core
principles (see FCC, 2015):
● Bright line standards (no blocking, no traffic degradation, no paid prioritization).

● Broadband access services, both fixed and mobile, were reclassified as common
carrier services according to Title II of the Communications Act.
● Additional safeguards for edge providers and customers (along the lines of the
2005 declaratory order) were adopted.
In Europe, broadband markets are less concentrated than in the USA (see Krämer
et al., 2013). This may explain the European Commission’s cautious view on any ex ante
regulation of ISPs. In a less concentrated market there may be less potential for unlaw-
ful behavior of ISPs as long as consumers are able to figure out that certain services are
blocked or degraded and can switch in a reasonable time. Moreover, European competi-
tion and telecommunications law already provides tools sufficient to deal with many of
the problems of net neutrality. The risk of discrimination through (potentially) vertically
integrated content and network providers can be addressed by means of sector-specific
regulation, as an ISP with significant market power can be obliged to provide access
to its facilities under current law. In this case, a regulation of access fees already pre-
vents discrimination by (vertically integrated) ISPs.21 Moreover, discrimination can be
addressed by means of competition law. Article 102 of the TFEU prohibits the abuse
by one or more undertakings of a dominant position within the internal market or in a
substantial part of it. Hence, the European Commission’s Universal Service Directive22
acknowledges the positive effect of prioritization traffic and product differentiation, as
long as consumers have a free choice of services and the conditions of these services are
transparent to consumers.
9.5.2.2 Quality of service and price discrimination

Strict net neutrality prevents ISPs from prioritizing and discriminating against certain
traffic. However, one of the main arguments against this best-effort principle is that serv-
ices differ in their sensitivity to delay. Streaming services and VoIP are more sensitive to
delay than, for example, web browsing and emails. Moreover, services like e-health may
be highly sensitive to delay and require guarantees of prioritization. Hence, proponents
in favor of price and quality differentiation and against net neutrality state that it makes
sense to allow for traffic management by (1) offering different categories of quality of
services and (2) price differentiate according to the sensitivity of delay. In contrast,
advocates of strict net neutrality fear that this kind of traffic management may result in
competition and welfare-distorting behavior by ISPs.
In the theoretical literature, there are arguments both in favor of and against discrimi-
nation. Hermalin and Katz (2007) and Litan and Singer (2007) widely acknowledge the
positive effects of differentiation in service quality. In their model, ISPs only offer a
single medium quality under net neutrality, whereas differentiation makes it possible to
offer efficient high-quality to high-valuation providers. Moreover, due to the structure of
the Internet one has to consider a further effect of strict net neutrality. All services use

the network as a common resource. As stated above, services differ in their sensitivity to
delay. Too much traffic of less sensitive services, such as file sharing, can cause capacity
overload and delay or loss of data packages. This capacity overload, however, mainly
affects the high-sensitive services like IP television. Finally, if this happens reasonably
often, the high-sensitive services may be crowded out by low-sensitive services, which is a
well-known phenomenon of the ‘tragedy of the commons’. To avoid crowding out, ISPs
have to manage traffic according to the sensitivity of delay and provide different quality
class contracts (quality of service).
On the other hand, Economides (2008) points out that in such cases an ISP may abuse
its market power and also force low valuation providers to accept priority pricing. Choi
and Kim (2010) find ambiguous effects of prioritization on welfare. They state that for
a large set of parameters a discriminatory regime may lead to lower short-run welfare.
Bauer (2007) furthermore points to potential dynamic inefficiencies. Summarizing the
theoretical literature, Schuett (2010) concludes that while welfare effects are not entirely
clear, in many scenarios there are likely to be positive effects of non-neutrality.
Clearly on the other hand, service and price discrimination may carry the potential
for ISPs to behave in an unlawful manner and distort competition and welfare. ISPs
with significant market power, however, are subject to control of dominant behavior in
Europe as well as in the USA. Article 102 of the TFEU prohibits discriminatory behav-
ior by companies enjoying a dominant position. In the USA, Section 2 of the Clayton
Act prohibits price discrimination if such discrimination substantially lessens competi-
tion or tends to create a monopoly. In a competitive environment, ISPs are free, as is
any other company, to offer differentiated services. The parties will monitor whether
the respective qualities promised are really maintained, and otherwise they are free
to switch. Hence, the European Commission puts a special emphasis on transparency
of providers’ terms and condition. The EU Commission’s Universal Service Directive
forces national regulatory authorities to put transparency obligations into national law.
According to the directive, providers with a significant market share have to provide
the regulatory authority with the terms and conditions for access to and usage within
their network. Moreover, all providers are to disclose information to consumers about
their net neutrality policy. This should enable consumers to choose between provid-
ers. Practically, it may be questioned whether consumers are able to evaluate and
compare the net neutrality policy or whether this requires great expertise. Finally, the
EU Commission’s Universal Service Directive entitles national regulators to secure a
minimum quality level if necessary.
A case for strict net neutrality regulation is not compelling, as many violations are
already recognized as cases subject to antitrust and competition law (see Yoo, 2005, 2007;
Sidak, 2007). Strict net neutrality, where all services are treated equally, is economically
inefficient, since services differ in their sensitivity to delay and users differ in their will-
ingness to pay for these services. Although network management can provide incentives
for discriminating, competition policy already provides sufficient tools to deal with many
of the concerns and further ex ante regulation of net neutrality is not urgent. Finally,
a departure from strict net neutrality may allow ISPs to deviate from the zero-pricing
rule for content providers and split the charges between content providers and users.
Economically, this seems to be more efficient than the current ‘receiving-party-pays’
principle since both parties share a benefit from the content.

9.6 CONCLUSION
In principle, online markets are prone to similar competition concerns as offline markets
and competition policy can address many of the concerns by well-established competi-
tion policy tools. Some of the tools need to be adjusted to account for special charac-
teristics of Internet markets such as their two-sidedness. Open questions concern, for
example, whether the acquisition of data resources may require additional analysis in
merger cases or whether increased price discrimination and, at the extreme, personalized
prices may make market definition exercises practically infeasible.
In addition, Internet markets are typically more dynamic than long-established goods
markets. Any intervention has to balance safeguarding a fair and level playing field
against maintaining incentives for innovative players in the markets. We conjecture that
competition concerns at the service level can be widely solved by competition policy,
whereas there is some scope for regulation at the infrastructure level. The degree of regu-
lation and competition policy intervention certainly depends on competitive conditions,
which differ in Europe and in the USA.
Areas for future research include the precise effects of APPAs, which are less well
understood than traditional best-price clauses. In addition, major research efforts are
necessary to better understand the value of data for competitive processes and the con-
ditions under which databases may become essential for competition. Under what cir-
cumstances do data become an essential facility? If data constitute a bottleneck, under
what conditions should access be granted and how should the original data collector
be compensated? Should data resources be specifically analyzed in merger proceedings?
These questions lead to the further field of privacy and competition. While data sharing
may be helpful to foster competition, if data are used as a resource, privacy concerns
may arise, as subjects granting one company access to personal data may not be willing
to do the same for another company. These questions again lead to more mundane and
practical questions, such as how markets can be delineated and how market shares can
be calculated if consumers do not generate sales but ‘pay’ with their data and/or atten-
tion. Other open questions concern (pricing) algorithms, following the US Department
of Justice’s indictment against Buy 4 Less, Buy For Less, and Buy-For-Less-Online for
conspiring with third-party sellers to fix the prices of posters sold online via Amazon
Marketplace: to what extent, therefore, can pricing algorithms serve as potential devices
for facilitating collusion and under which circumstances? How should their adoption be
treated under antitrust law? Hence, many open questions remain and the design for and
application of competition rules to Internet markets will remain an interesting area for
further research.
NOTES
* We would like to thank Johannes Bauer for his extremely valuable comments on a draft of this chapter.
1. See, for example, Ellison and Ellison (2005), Evans and Schmalensee (2007, 2008), Evans (2013),
Buccirossi (2013), Haucap and Heimeshoff (2014).
2. The capacity on one side of the market may be more limited than on the other. For example, the number
of stands may be more limited at a trade show than the space for potential visitors.
3. This does not necessarily have to be the case though. Kaiser and Song (2009), for example, find in an

empirical study of the German magazine market that readers tend to appreciate advertising in women’s
magazines, business and politics magazines as well as in car magazines.
4. See also Evans and Noel (2008).
5. For a different conclusion see Luchetta (2014).
6. See ‘Algorithms’, accessed 22 August 2015 at http://www.google.com/insidesearch/howsearchworks/algo-
rithms.html.
7. A much more detailed analysis of a potential antitrust case against Google and the costs and benefits of
various remedies can be found in Pollock (2010), Manne and Wright (2011) and Bork and Sidak (2012).
8. See ‘Antitrust: Commission obtains from Google comparable display of specialised search rivals –
Frequently asked questions’, accessed 22 August 2015 at http://europa.eu/rapid/press-release_MEMO-
14-87_en.htm?locale=en.
9. See ‘Statement on the Google investigation’, accessed 22 August 2015 at http://europa.eu/rapid/
press-release_SPEECH-14-93_en.htm.
10. See ‘Commission approves selective distribution system for Yves Saint Laurent perfume’, European
Commission Press Release IP/01/713 of 17 May 2001, accessed 22 August 2015 at http://europa.eu/rapid/
press-release_IP-01-713_en.htm?locale=en.
11. See United States of America v Apple Inc, 12 Civ. 2826 (DLC), Opinion & Order, p. 94, accessed 8 January
2016 at http://www.nysd.uscourts.gov/cases/show.php?db=special&id=306.
12. See, for example, European Commission Decisions EL/2010/1113 and IT/2010/1103.
13. See Supreme Court of the United States, Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555
U.S. 438 (2009).
14. See Supreme Court of the United States, Verizon Communications Inc. v. Law Offices of Curtis V. Trinko,
LLP (02-682), 540 U.S. 398 (2004), 305 F.3d 89, reversed and remanded.
15. Further surveys are provided by Faulhaber (2012) and Krämer et al. (2013).
16. See, for example, Director and Levi (1956), Posner (1979) and Bork (1993).
17. See, for example, Whinston (1990, 2006). Ahlborn et al. (2004) and Rey and Tirole (2007) provide over-
views of post-Chicago models challenging the one-monopoly-rent hypothesis.
18. FCC File No. EB-05-ICH-0110, 2005.
19. The investigation was dropped under terms of a consent decree.
20. FCC File No. EB-08-ICH-1518, 2008.
21. Similarly, according to Section 2 of the Sherman Act dominant companies can be obliged to provide
access to essential facilities. However, different from Europe, the FCC characterizes broadband services
as information services and thus, cable net operators in the USA are not part of the Common Carrier
obligation.
22. Directive 2009/136/EC of the European Parliament and of the Council of 25 November 2009 amending
Directive 2002/22/EC on universal service and users’ rights relating to electronic communications net-
works and services, Directive 2002/58/EC concerning the processing of personal data and the protection
of privacy in the electronic communications sector and Regulation (EC) No. 2006/2004 on cooperation
between national authorities responsible for the enforcement of consumer protection laws (Universal
Service Directive).
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Competition and Antitrust in Internet Markets: Justus Haucap and Torben Stühmeier

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9.

Competition and antitrust in Internet markets

9.2 COMPETITION IN ONLINE MARKETS

9.2.1 Key Characteristics of Online Markets

Johannes M. Bauer and Michael Latzer - 9780857939845

9.2.2 Concentration of Online Markets

As a consequence of indirect network effects platform markets may be more concen-

Johannes M. Bauer and Michael Latzer - 9780857939845

Table 9.1 Determinants of concentration in two-­sided markets

Driving Force Effect on Concentration

Source: Evans and Schmalensee (2008).

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

number of transactions already conducted over the platform, it is typically platform

9.2.3 Market Definition for Platform Markets

Having discussed the determinants of concentration in two-­sided markets, let us now

Johannes M. Bauer and Michael Latzer - 9780857939845

9.3 COMPETITION AMONG SEARCH ENGINES AND THE

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

In addition, further proceedings are underway at US state level as well as in India,

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

9.4 VERTICAL RESTRAINTS IN INTERNET COMMERCE

Johannes M. Bauer and Michael Latzer - 9780857939845

● general bans on online sales by manufacturers;

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

Source: Buccirossi (2013, p. 22).

Figure 9.1 An across-­platforms parity agreement (APPA)

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

9.5 COMPETITION ISSUES AT THE INFRASTRUCTURE

9.5.1 Price and Margin Squeezes in Internet Access Markets

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

9.5.2 Net Neutrality

Traditionally, the Internet has developed within a non-­discriminatory architecture. All

9.5.2.1 Blocking and degradation

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

● Bright line standards (no blocking, no traffic degradation, no paid prioritization).

9.5.2.2 Quality of service and price discrimination

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

Johannes M. Bauer and Michael Latzer - 9780857939845

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Table 9.1 Determinants of concentration in two-sided markets

Having discussed the determinants of concentration in two-sided markets, let us now

9.3 COMPETITION AMONG SEARCH ENGINES AND THE

Figure 9.1 An across-platforms parity agreement (APPA)

9.5 COMPETITION ISSUES AT THE INFRASTRUCTURE

Traditionally, the Internet has developed within a non-discriminatory architecture. All