Open Access Research Article
Tipping of Markets. A Brief Analysis - by Apoorva Kaur
Published Paper
Article Details
Tipping of Markets. A Brief Analysis[1]
Authored
by –
Apoorva
Kaur
INTRODUCTION
In the simplest terms,
tipping occurs when a critical mass is reached in a market. This is the major
reason as to why network industries are concentrated with a dominant
undertaking. [i] This
paper outlines the factors which are responsible for tipping in the market.
Network Effects, being one of the primary reasons for tipping in the market,
which implies, the value of the product rises with number of users who are
using the product. It gives a competitive advantage to people who have more
users on their network. The product becomes a “must-use” product, simply
because everyone owns that product regardless of the quality of the product.
Tipping of the market is a situation where the “winner takes it all”. This
paper shall discuss that whether the tipping of the market is predictable,
whether it can be measured or not?
This paper shall in
detail discuss how market for search engine has been tipped in favour of
Google. [ii]
It shall also provide instances of Facebook, the market for social networking
platform has been tipped in favour of Facebook.
This paper shall review
the effects of tipping in the market. It shall broadly cover how tipping shifts
the ‘competition in the market’ to ‘competition for the market’. Competition is
stifled, once a player achieves dominance in the market. How tipping is a
barrier to a new entrant in the market
Digital platforms contain
a number of characteristics, such as network effects, switching costs, and
other entry barriers, that make them vulnerable to be skewed in favour of a
single dominating undertaking. As a result, new entrants cannot compete with
these networks, and the competitive advantage moves from ‘competition in the
market to competition for the market.".[iii]
Network effects, in particular, trigger a lock-in effect that makes switching
to another network difficult or impossible for users. Single homing and lock-in
is typically prone to tipping of a market structure. Since Facebook is not
interoperable with other social networks, users who choose to move to another
site must pay a high fee, effectively locking them into Facebook's platform.
High switching costs are also persisting in other markets. This shall be
discussed in length in the paper.
The paper tries to build
a distinction between market success and tipping. It will debate on whether
tipping is an anti-competitive practise?
This paper shall
emphasize the factors which shall mitigate tipping in the market. The nature of
inter-platform competition between platforms and one-sided rivalry in the
market is strengthened by the presence of multi-homing on different sides of
the platform, making the competitive game field more contestable and preventing
tipping.[iv]
Multi-homing will also
help new entrants attract clients even if they are already on a huge network,
lowering the high barrier to market entry. Interoperability is the ability to
exchange information from one portal to another. This enables to lower
switching costs for users by ensuring that they do not lose access to their
network as a result of switching.
FACTORS LEADING TO THE TIPPING
OF MARKETS
There are certain factors which facilitate tipping and concentration of
the markets which are discussed at length below: -
Role of Network Effects in Tipping of the markets
Network effects are the mechanisms in a product and business where each
new user increases the value of productor service for all other users.[v] When one additional user
boosts the value created by other users of the same platform, this positive
externality between users is called a ‘positive network effect’. More searchers
improve the algorithm of a search engine, making it more valuable to other
users. This structure leads to a positive feedback loop between the users,
which in turn facilitates tipping. When
consumers regard a product as a must-have because it has the most users, demand
for that product may rise. There is no guarantee that the presence of network
effects will result in monopoly or tipping. Markets that have substantial
network effects may be prone to tipping.
The network effects have the potential to bolster the market position of
the largest players in a short period of time. In reality this might raise
entry barriers or generate a vicious circle where corporate giants grow huger,
leaving smaller undertakings in a position to not to able to compete. This
scenario could result a market equilibrium in which everyone joins only one of
the networks and only one undertaking.[vi] For instance, the network effects can be
understood with case of Facebook-WhatsApp and Instagram merger. How social
media platform has been tipped in favour of Facebook and scrapped the existence
of other messaging and social media apps. Earlier, there used to be Orkut, but
now it has been scrapped in the market, with the means of positive network
effects.
Complementary
Offerings: -
The complimentary offerings also generate tipping points in the market
ecosystem. This mechanism attracts the consumers to stick to a single platform
for a multitude of services. This can also lead to single-homing which indeed
is prone to tipping of the markets.
This can be explained with the example of Microsoft’s strategy, how it
tipped the internet browser in its favour. In 1994, Netscape launched the first mass-market browser and
dominated the ecosystem for quite a long time. Later, Microsoft came with its
very own browser, ‘Internet Explorer’ and included it as a free download with
Windows. As a large number of new personal computers were shipped with Internet
Explorer over the span of time, and as Microsoft advanced its browser
technology, Netscape’s browser sank from around an 80 percent market share to a
negligible presence in the market. Because it had such a large share in
operating systems, Microsoft breached the antitrust laws by bundling a product
for free that competitors provided for sale and occasionally for free as well.
The other instance of
explaining this strategy of tipping can be dealt with the example of business
model of google. Google induced complimentary offerings to use its platform for
multitude of services, ranging from email to google photos, maps, drive,
chrome, search and docs. This single-homing leads to tipping of the market in
favour of google.
Economies
of Scale
Corporations benefit from economies of scale when their production gets
more efficient. Economies of scale have a tendency to massively accelerate the
tipping of the market. They are one of the major factors which restrict the
entry of the new entrants in the markets because of their cost advantage. The
conventional market structure is expected to consist of a few major
enterprises, each with great market power, where significant economies of scale
exist. It implies that at competitors are less likely to enter or remain in the
market if the dominant undertaking forecloses a major portion of the relevant
market, resulting in market structure concentration as a result of the dominant
player's conduct.
Facebook grew from one
million members in 2004, the year it was founded, to over 350 million members
in under five years, reaping the benefit to increased returns to scale.[vii]
Google, too, benefited from economies of scale and the self-reinforcing
benefits of data, as well as aggressive business strategies used to hinder
competition at important points. As a result of these factors, Google today has
a long-term monopoly in the broader internet search business.[viii]
Higher Switching Costs
Switching costs refer to the expenses in terms of time, effort, or money
incurred when switching from one incompatible product to another. When
switching costs are high, customers are more likely to continue with the same
supplier throughout their life cycle, resulting in customer lock-in.
This also creates significant barrier to entry to other competitors in the
market, leading to monopolized market. Apple, for example, creates a lock-in
effect for its customers by requiring them to purchase everything from Airpods
to Apple TVs in order to keep their electronic devices in sync.
Barriers
to Entry
The presence of high barriers to entry in the market results in more
market concentration and increases the chances of tipping towards one or a
small number of players. Factors such as single homing, higher switching cost,
lock-in of customers lead to barriers to entry for the new entrant in the
market. This further results in tipping of the market and winner taking it all
in the structure.
Amazon’s rampant growth in private label brands and its reach to almost
sector is the tipping point for creating the e-commerce giant into a monopoly.
It has expanded its wings into spectrum of services in the digital economy.
Right from Kindle to amazon webservices, it is has almost become a one-stop
station for all requirements of a consumers, it facilitates amazon pantry,
amazon pay, amazon firestick, amazon prime, alexa, Echo, amazon drive, music
what not. It has literally become a giant with a to z in the market. This business
model is interesting to study which is likely creating barrier to entry from
other small undertakings.
Competition
for the market
The struggle of generating a new ecosystem, or to establish a new
benchmark, which is usually related to the advent of innovation is implied as
‘competition for the market’. Whereas, competition in the market means the
conventional approach of competition where there are players in the
well-established markets. Strong network effects can generate tipping points,
which in turns leads to tipping of the market. For example, Facebook and its
family of products have tremendous network effects, and there are strong
tipping points in the social networking market that produce competition for the
market rather than competition in the market.[ix] When the markets reach tipping
point, it is no longer contestable by new entrants, hence, it switches the
competitive process from ‘competition in the market’ to ‘competition for the
market’. This shift undermines the competitive process and promotes the abuse
of dominance of the monopolistic player in the ecosystem.
FACTORS MITIGATING TIPPING IN THE MARKET
Platform
Differentiation
Platform differentiation is when platforms differentiate or set apart
themselves from their competitors by targeting and focusing on a specific set
of user groups. The
market will tip if both user groups single-home on many platforms and platforms
offer non-differentiated offerings to each group. The only manner in which a
new platform may dilute the position of the leading platform is to
differentiate itself from it and to target on a specialized market niche,
taking leverage of the user heterogeneity. Example of Apple’s iPhone is perfect
to understand product differentiation. Platforms also provide services that
entice customers from one side regardless of the steps taken by the other side.
For instance, smart phone. The market in this segment is competitive and
co-existent. Furthermore, platform differentiation, along with low switching
costs, leads to multi-homing, which leads to customer desire for many
platforms.[x] The
less network effects matter for the competitive process, the more distinctive
platforms are, at least in the eyes of consumers, allowing numerous platforms
to survive in the market.[xi]
For example,
Snapchat, for example,
was able to set itself apart from Facebook by developing a product focused at a
younger population, and as a result, it was able to attract marketers looking
to reach that audience.[xii]
As a result, increased differentiation between competing platforms reduces
tipping.
Multi
Homing
If the two platforms are
substitutes, multihoming may be a factor in reducing the likelihood of tipping.[xiii]
Tipping is less likely in a
market where users can easily split their time over multiple platforms than it
is in a market where each user stays to one platform. (single-homing)
Multi-homing can reduce a network's defensibility and attenuate network
effects, but only to a certain degree.
The more multi-homing
there is at the different sides of the platform, the more is promoting the
dynamics of inter-platform competition or competition between platforms and
one-sided competitors on a product market thus making the field of the
competitive game more contestable and can thus mitigate tipping.[xiv]
This can also help new entrants overcome the high barrier to market entry by
allowing them to win over consumers who are already on a major network.[xv]
Inter-Operability
Interoperability is a mechanism which can intensify competition in the
market. It is one of the parameters which can mitigate tipping of the market.
Interoperability is the ability of different platforms / devices to share
technology or information. Greater interoperability will mean it is less likely
for markets to tip in favour of a player as it reduced the barriers to entry
and growth of competitors. As, a result, greater inter-operability can also
reduce the tipping of the market in favour of a player. Facebook has made its
platform inter-operable with WhatsApp and Instagram, the data and images can be
inter-operated from one platform to another. But this has tipped the social
media platform in favour of Facebook.
Another instance of inter-operability can be seen is in the case of
telecommunications, where there is inter-operability amongst the players of
this segment, hence the market is at the competitive edge in this segment of
the industry.
MEASURING OF TIPPING AND
UNDERSTANDING THE NATURE OF TIPPING
Tipping point is
predictable only when it can be seen in the market that an incumbent is
contributing to competition of the market by introducing a variety of products
on its platform to induce single homing and attract more consumers to its platform.
As soon as it is realized, the ship has already sailed to abuse its dominance
in the market structure.
Identifying the tipping
point and measuring the market structure is quite a tricky question. To begin,
we must evaluate the nature of the competition and pinpoint the market where
the theory of harm is likely to emerge. The method for determining market power
will be unique to the conduct under inquiry. Second, while evaluating a
multi-sided market, a sequential method should be used, meaning that all sides
of the market should be evaluated at the same time. Finally, while calculating
market tipping, the player's behaviour is a critical factor to consider. To
evaluate tipping using empirical data, is very tough task since it is a
comparison of expected concentration and hypothetical concentration of market
structure. It should more of a utility and customer satisfaction test.[xvi]
In my opinion, when a
dominant player reaches the tipping point in the market structure, that can be
the market success for that undertaking, but as soon that very dominant player
exploits the position, it becomes an anti-competitive practise. Tipping is
essentially distinctive from the concept of market success because, it is point
where the market success is exploited by a dominant undertaking. The market
success’s exploitation drives to the tipping point in a market structure. However, in order to properly see why
this market is so concentrated, one needs consider the significance of tipping
in markets with indirect network effects.
COMPETITION COMMISSION’ S
STAND ON TIPPING
There are multiple instances when Competition Commission of India (CCI)
took cognizance of abuse of dominance of players in the market and imposed
penalties upon them. Let us discuss the two cases in brief.
Competition Commission of India took a note of complaint against Ola and
Uber taxi service providers for cartelization and ordered investigation,
however these providers won the case. An unprecedent move was seen when CCI
exercised its power to issue interim order to redress competitive injury in the
Online Travel Agencies (OTA) market structure in India.
In 2019, the Competition
Commission of India launched an investigation against Online Travel Agencies (OTA) players, namely,
MakeMyTrip Private Ltd. (also known as MMT) and Ibibo Group Pvt. Ltd. (also
known as Go-Ibibo) (jointly, MMT-GO). The probe was initiated against them
under Section 3(4) and Section 4 of the Competition Act, 2002. The allegations
mainly pertained to MMTGO’s exclusive agreement with Oravel Stays Pvt. Ltd.
(also known as OYO) which allegedly resulted in foreclosure of the market for
hotels / accommodations.
On 9th March
2021, while the investigation is still on-going, the CCI awarded interim relief
to two franchisee budget hotels namely, FabHotels and Treebo by ordering MMT-GO
to immediately relist both hotels on its web portals. Denial of market access
in any way that restricts an enterprise's ability to compete successfully in
the market is in violation of the Act. More specifically, in dynamic markets
where the winner takes it all, denying market access can have the irreversible
consequence of shifting the market in favour of market incumbents with strong
market strength. OYO, here is dominating and enjoying this position.
While this interim order
will set the tone for future investigations into digital marketplaces, how the
CCI ends its investigation into MMT-GO and OYO remains to be seen.
INDIAN HEALTH MARKET AT A
TIPPING POINT
The health sector is witnessing an exciting tipping point during
Covid-19 crisis in IndiaDuring the COVID lockdown, there was a considerable
rise in demand for online health services. Pharmaceutical companies rushed to
produce coronavirus testing, treatments, and vaccinations. The demand for
injections like remedesivir, fabiflu, demand for oximeters, respirometers and
pharmaceutical drugs raised multiple challenges in the market structure, higher
demand also led to bombing prices and also the fabricated market. The
regulatory mechanism shall be imposed in the market structure at the earliest
to protect the consumers from facing further anti-competitive destruction.
CONCLUSION
Tipping can also be defined as a mechanism that leads to a market being
served by only one undertaking, with the remaining players exiting the
structure. Tipping, in essence, wins platform wars by generating market
momentum.
To re-establish competition, consumers and companies may need to work
together to transition to a different platform. Competition in the market
promotes consumer welfare, and public interest clearly points out that
maximizing consumer welfare should be at the forefront of both competition
policy and law.
Competition authorities and regulatory bodies need to recognize the
tipping points of the markets that might lead to concentration of market where
a dominant player shall abuse its position and eliminate the competition from
the market. Timely intervention of authorities is very crucial to assess
tipping and behaviour of player. The toolkit approach[xvii],
that is combining different fields of law and regulation and act as a
regulatory compass. Another way suggested by this report is to regulate tipping
is by advent of principle of social responsibility. It can also be
interpreted as, with great power comes great responsibility. This principle was
recognized in the case of Michelin v. Commission.[xviii]
In this case, the Court had a finding that a dominant player has a specific
obligation to ensure that its conduct does not obstruct real competition in the
market.
Certain traits such as booming growth patterns and multi-market presence
can indicate the tipping players in the market. However, success of a player in
the market must be interpreted differently from a tippy market. The rampant
growth of the digital platforms has served the consumers, but it also has
raised the stress of competition strategies in the market.
Consumer welfare and competition in the market shall be preserved for
striving a balance in the market structure. Antitrust enforcements require the
constant ability to adapt to unprecedented and severe threats to the
competition. The continuous evaluation and amendment of the competition law
shall be the task of the legislators. The scope of competition policy should be
expanded to inculcate digital platform business to promote free and fair
competition. Also, tools for detection of anti-competitive practises should be
included in the policy. A transparent, pro-competitive and non-discriminatory
market structure must be ensured in the market structure.
BIBLIOGRAPHY AND END NOTES
[i] Vikas Kathuria, “A Legal Toolkit for Fair and Competitive
Digital Markets in India” (2021) Observer Research Foundation 307
[ii][ii] Nicolas Petit, Natalia Moreno Belloso, “A Simple Way to Measure Tipping
in Digital Markets” (2021) available at https://promarket.org/2021/04/06/measure-test-tipping-point-digital-markets/
[iii] Jerrold Nadler and David N. Cincilline,“Investigation of
Competition in Digital Markets, Majority Staff Report and Recommendations”
(2020)
[iv] Digital Competition Era: A BRICS Review, Report by the BRICS
Competition Law and Policy Centre
[vi] Joseph Bell, “Competition in the presence of network effects,
when fewer is more” (2019) available at
https://www.oxera.com/insights/agenda/articles/competition-in-the-presence-of-network-effects-when-fewer-is-more/
[vii] Majority Staff Report and Recommendations on “Investigation of
Competition in Digital Markets” by Subcommittee on Antitrust, Commercial
and Administrative Law (2020)
[viii] Supra, Note vii
[ix] Supra, Note vii
[x] Evans, D.S. and R. Schmalensee "The
Industrial Organization of Markets with two-sided Platforms" (2005)
Competition Policy International Journal Vol.3(1) 151-179
[xi] Bruno Jullien and Wilfried Sand-Zantman, “The Economics of
platforms: A Theory Guide for Competition Policy” (2020) TSE Digital Center
Policy Papers series Vol. 1
[xii] Andres V. Leaner, “The
Economics of Network Effects and User Data in the Provision of Search, Search
Advertising, and Display Ad Intermediation” (2019) available at https://www.accc.gov.au/system/files/Google%20Submission%203%20%28May%202019%29.pdf
[xiii] Report by OECD on “Rethinking
Antitrust Tools for Multi-Sided Platforms” (2018) available at https://www.oecd.org/daf/competition/Rethinking-antitrust-tools-for-multi-sided-platforms-2018.pdf
[xiv] Supra, Note iv
[xv] Facebook decision
[xvi] Jean-Pierre Dube, Günter J. Hitsch, and Pradeep
Chintagunta, “Tipping and Concentration in Markets with Indirect Network
Effects” (2010) Vol. 29 (2) 216-249
[xvii] Supra, Note iv
[xviii] [1983] Case 322/81
Article Information
Tipping of Markets. A Brief Analysis - by Apoorva Kaur
Authors: Apoorva Kaur
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/11/24
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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