Can marketplaces be penalized for enabling unfair competition among sellers?

Unfair competition among sellers in online marketplaces can take many forms, including price-fixing, exclusive agreements, biased ranking algorithms, and other anti-competitive practices. Marketplaces that host multiple sellers have a responsibility to ensure that their platforms are not used to promote such practices, as they can distort the market, harm consumers, and lead to legal consequences. Online platforms could be penalized if they fail to prevent or enable these practices. In many countries, competition law (also known as antitrust law) prohibits actions that prevent fair competition or manipulate the marketplace to favor certain sellers.

Key Points on Marketplace Liability for Enabling Unfair Competition

Legal Framework and Responsibility

Online marketplaces are subject to competition laws in most jurisdictions, which are designed to maintain market fairness and prevent unfair advantages for certain sellers. These laws can be enforced by competition authorities and apply to both:

• Sellers who engage in unfair practices such as price manipulation or market collusion.
• Marketplaces that enable or fail to prevent these actions.

• Antitrust Laws: Many countries have antitrust laws that prohibit price-fixing or any form of collusion between competitors. If an online marketplace enables or turns a blind eye to such practices, it could be held accountable under these laws.
• Consumer Protection Regulations: In addition to antitrust laws, consumer protection regulations also play a role. If a marketplace’s actions or inactions lead to harm or disadvantage to consumers, the platform may be held responsible under laws that protect consumer rights.

Unfair Practices Facilitated by Marketplaces

Several types of unfair competition can arise on online marketplaces, which could expose the platform to legal risks:

• Price-Fixing: If sellers on a marketplace collude to set prices for their products (either directly or indirectly), this can distort market dynamics and harm consumers by preventing them from getting the best prices. For example, sellers may agree to sell at a higher price to avoid price wars.
• Exclusive Agreements: Some marketplaces may allow or encourage exclusive deals with sellers, where certain sellers are given special privileges, such as better product placement or access to proprietary data, which could harm competition by excluding other sellers.
• Biased Ranking Algorithms: Marketplaces often use algorithms to rank products based on factors like price, quality, and consumer reviews. If a marketplace manipulates its ranking system to unfairly favor certain sellers over others (e.g., by promoting products from sellers who pay higher fees), it can create an uneven playing field.
• Tying Arrangements: This occurs when a marketplace requires sellers to bundle products or services together, potentially forcing consumers to purchase unwanted items or services. This can distort fair competition by limiting consumer choice.
• Predatory Pricing: Some marketplaces or sellers might engage in predatory pricing selling products at a loss to drive competitors out of the market. This can ultimately lead to monopolistic behavior when competitors are eliminated.

Marketplace’s Duty to Prevent Unfair Practices

Marketplaces have a duty to take reasonable steps to prevent unfair competition and maintain a fair, competitive environment. Here are some of the steps platforms can take:

• Monitoring Seller Activities: Marketplaces should monitor pricing practices and business agreements between sellers to detect any signs of price-fixing or other collusive behaviors. This could involve the use of technology to track pricing trends and flag suspicious patterns.
• Enforcing Fair Ranking Practices: Marketplaces should ensure that their ranking algorithms are not biased or manipulated in favor of certain sellers. This means making sure that algorithms are transparent and based on objective factors such as consumer reviews, product performance, and actual sales.
• Regulating Exclusive Deals: Marketplaces should ensure that exclusive agreements between sellers and the platform do not harm competition by restricting other sellers from accessing the same promotional opportunities.
• Tightening Seller Terms and Conditions: Platforms can include clauses in their terms and conditions that explicitly prohibit anti-competitive behavior, including collusion, price-fixing, and deceptive marketing tactics.

Penalties for Enabling Unfair Competition

Online marketplaces can face significant legal consequences for enabling or failing to prevent unfair competition:

• Monetary Penalties: Regulatory bodies can impose fines on marketplaces for facilitating unfair competition. For example, under the Competition Act in India, the Competition Commission of India (CCI) can fine companies up to 10% of their total turnover if they are found guilty of engaging in anti-competitive behavior.
• Civil Litigation: Consumers or businesses harmed by unfair competition may take the marketplace to court for damages. This could result in compensation claims, along with the cost of legal proceedings.
• Loss of Trust and Market Share: Besides legal consequences, marketplaces that facilitate unfair competition risk losing consumer trust and their reputation in the market. If sellers are found to be engaging in unethical practices, consumers may stop shopping on the platform, leading to a loss of revenue.
• Regulatory Scrutiny and Action: Competition regulators may investigate and penalize platforms that are perceived as enabling anti-competitive practices. In extreme cases, this can lead to stricter regulation or, in the worst case, forced dissolution of business operations.

Global Examples of Marketplace Liability for Unfair Competition

Several high-profile cases have highlighted the role of online marketplaces in facilitating unfair competition:

• Amazon (EU): Amazon has faced scrutiny in the European Union for potentially using its platform to give preferential treatment to its own products over third-party sellers, creating an unfair competitive advantage. The European Commission launched investigations into whether Amazon’s practices were anti-competitive and violated EU competition laws.
• Alibaba (China): Alibaba was fined by Chinese regulators in 2021 for allegedly engaging in anti-competitive behavior, specifically forcing merchants to choose between its two platforms, Taobao and Tmall, effectively excluding them from using other platforms. The fine was part of a broader investigation into the company’s business practices.
• eBay (US): In the U.S., eBay was investigated for facilitating price-fixing among sellers. While the platform wasn’t directly involved, regulators argued that it allowed or turned a blind eye to these practices, which resulted in fines and corrective actions.

Steps Marketplaces Can Take to Mitigate Risk

To avoid penalties and ensure compliance with competition laws, online marketplaces should:

• Develop Fair and Transparent Algorithms: Ensure that product ranking and visibility algorithms are transparent, based on merit, and free from bias. Make sure that the algorithms prioritize consumer interests and not seller payments or commissions.
• Adopt Strong Seller Agreements: Include clauses in seller agreements that strictly prohibit anti-competitive behavior, including price-fixing, collusion, and manipulating rankings.
• Invest in Monitoring Tools: Use AI and machine learning tools to regularly monitor seller activities and detect patterns that may indicate unfair competition or price-fixing.
• Create a Transparent Grievance System: Establish a grievance redressal system that allows sellers and consumers to report unfair practices. This can help the marketplace address issues before they escalate to legal consequences.

Example

Sara, a seller on an online marketplace called ShopPlus, notices that her competitors are listing similar products at higher prices, but these sellers' listings are getting higher visibility and better rankings on the platform. Upon investigation, she discovers that these sellers have paid the platform to get preferential treatment in rankings. Sara believes that this is an example of unfair competition and decides to report the issue to the marketplace’s customer service.

Steps Sara Could Take:

• Report to the Marketplace: Sara can file a complaint with ShopPlus, asking for transparency in their ranking algorithms and fairness in listing products.
• File a Complaint with Competition Authorities: If the platform fails to act, Sara could escalate the issue to the Competition Commission or other relevant regulatory bodies.

Steps ShopPlus Should Take:

• Investigate the Matter: ShopPlus should review the complaint and ensure that the ranking algorithms are not manipulated or biased.
• Corrective Action: If the investigation confirms preferential treatment based on payments, ShopPlus should immediately revise its algorithms to ensure fairness and transparency.