The Impact of Platform Most-Favored Nation Clauses on Seller Competition
How platforms benefit when sellers collude on price
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By Frank Schlütter.
In today's digital economy, online marketplaces like Amazon Marketplace or online travel agencies such as Booking.com play a crucial role in connecting sellers with consumers. Usually, these platforms thrive on competition among sellers, which ideally leads to better prices and services for consumers. However, the introduction of Platform Most-Favored Nation (PMFN) clauses can significantly alter this dynamic. PMFN clauses require sellers to offer the same or better prices on the platform compared to other distribution channels, such as competing platforms and sellers’ online stores. Such clauses can align the interests between sellers and platforms to restrict seller competition. This blog post explores the key findings of a recent theoretical study published in the Journal of Industrial Economics on PMFN clauses and their implications for competition and collusion among sellers.
[I]n the presence of PMFN, platform profits can be higher with seller collusion than with seller competition. A PMFN therefore can undermine a platform’s incentive and efforts to ensure competition between sellers.
Platforms’ Incentives for Competition Vs. Collusion
Without PMFN clauses platforms benefit from competition among sellers. The dominating effect is that seller competition leads to lower sales prices and higher sales volumes on which the platform can collect commissions. Importantly, as sellers can flexibly react to the commission rate on the platform by adjusting their prices, delisting from the platform is no relevant decision for the sellers.
With PMFN clauses the dynamics change significantly. PMFN clauses can align the interests of platforms with those of sellers towards collusion. Platforms can charge higher commissions from colluding sellers than from competing ones. If sellers compete aggressively and face high commission rates, they may delist from the platform to avoid the price-setting restrictions imposed by the PMFN. This restricts the commission rates of the platform, forcing it to set lower commissions if sellers compete aggressively. Conversely, if sellers collude (or compete less aggressively), this restriction is less severe, allowing the platform to sustain higher commissions. Consequently, in the presence of PMFN, platform profits can be higher with seller collusion than with seller competition. A PMFN therefore can undermine a platform’s incentive and efforts to ensure competition between sellers.
Stability of Seller Collusion
The study examines the stability of collusion which is sustained through a reward-punishment scheme referred to as grim-trigger strategies. As long as sellers adhere to the collusive scheme, they are rewarded with higher profits. Deviations from the scheme are punished such that sellers revert to competitive behavior for all future periods, leading to lower profits. Crucially, the punishment must be credible and sustainable.
Importantly, as a PMFN can make seller collusion beneficial for a platform, these clauses have the potential to undermine a platform’s incentive and efforts to ensure competition between the sellers active on its marketplace.
A PMFN significantly changes the credible punishment behavior which can lead to more stable collusive schemes. Without a PMFN, sellers remain active on all distribution channels and revert to charging competitive prices. However, if collusion with a PMFN breaks down, it becomes unprofitable for sellers to be listed on the platform at the higher commission rates at which colluding sellers were previously willing to operate. As a result, sellers delist from the platform and only sell via their direct channel at competitive prices after collusion breaks down, leading to lower profits. In other words, punishment for a deviation becomes more severe, making collusion more stable.
About the research: The study examines a theoretical model involving two online sellers who can reach consumers via two different distribution channels. The first channel is a platform that charges a commission rate (per unit or revenue share) for every transaction. The second channel is the seller’s direct channel, which allows the seller to reach consumers without paying a commission. The study compares scenarios where the platform imposes a PMFN clause versus scenarios without it. A PMFN ensures that sellers do not offer better prices on their direct channels, effectively leading to price parity between distribution channels.
Novel Theory of Harm
PMFN clauses have triggered substantial antitrust scrutiny in several jurisdictions and online markets such as hotel booking and e-books. Moreover, the recently enacted EU Digital Markets Act bans PMFN clauses for designated gatekeepers, reflecting growing concerns about their anticompetitive potential.
A case in point is the famous e-book cartel case that involved a PMFN and in which five major publishers of e-books as well as the platform provider Apple were found guilty of engaging in illegal retail e-book price fixing on Amazon and Apple’s iBookstore. Commentators have argued that the PMFN introduced a credible threat for the e-book publishers to reduce the availability of their books on Amazon. While certain aspects of the e-books case are not covered by the theoretical analysis, the study nevertheless demonstrates that the credible threat of delisting due to a PMFN in fact can have an important effect on the stability of seller collusion.
More generally, the study provides a novel rationale for treating PMFN clauses with caution, as they can facilitate seller collusion and reduce competition. Importantly, as a PMFN can make seller collusion beneficial for a platform, these clauses have the potential to undermine a platform’s incentive and efforts to ensure competition between the sellers active on its marketplace. This adds to established concerns regarding PMFNs, which includes the prediction that PMFNs restrict competition between platforms and lead to higher commission rates.
This blog is based on the author’s research, which is published in the The Journal of Industrial Economics and is included in the Platform Papers references dashboard:
Schlütter, F. (2024). Managing Seller Conduct in Online Marketplaces and Platform Most‐Favored Nation Clauses. The Journal of Industrial Economics, 72(3), 1139-1194.
Disclaimer: Frank Schlütter is an economic consultant at Charles River Associates (CRA). The views expressed in this blog post are solely those of the author and do not reflect the official position of CRA.
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