Narrow Price Parity and Market Power in Digital Platforms

Policy Paper 56

Abstract

This paper deliberates an appropriate policy approach to Price Parity Obligations (“PPOs”), particularly narrow PPOs, applied by business-to-consumer (“B2C”) digital platforms. This is done by considering both the anticompetitive effects and procompetitive and efficiency arguments for the use of narrow PPOs in markets intermediated by digital platforms through the lens of market power. While wide PPOs are generally considered anticompetitive, this view is mixed for narrow PPOs. When digital platforms with market power apply narrow PPOs it suppresses price differentiation and price competition, resulting in higher average prices; it also increases business user dependency on the platform which reinforces platform market power; it can enable the exploitation of business users by unilaterally raising commissions and restrict their flexibility to innovate and develop their own direct distribution channels and marketing strategies. Arguments justifying the use of narrow PPOs include a determent of free-riding behaviour and the so-called ‘billboard effect’, but research suggests that on balance this has a minimal impact and courts have determined that narrow PPOs are not a precursor to platform efficiency gains. Smaller platforms with little or no market power are unlikely to have sufficient power to enforce narrow PPOs. This raises the relevance of applying these pricing restrictions altogether. When considering these arguments holistically, the paper argues that ex-ante regulation of narrow PPOs is the better policy approach.