Defining Digital Platforms: An Indirect Challenge

Is the Hypotehtical Monopolist Test fit for purpose to define digital platform markets? What can regulators learn from the economics of indirect constraints?

 

The power of digital platforms is the subject of much political and social concern in many countries. Some politicians and other commentators are expressing a need for their market power to be reigned in through regulation. However, applying economic regulation means following a process that begins with defining the relevant market. In this edition of Hexagon, we consider how the economics of indirect constraints may be a useful addition to the traditional SSNIP test.

 

All competition cases and market investigations begin with a definition of the market: issues within the boundary are investigated whilst those outside are ignored. The standard tool for defining a market is the well-known Hypothetical Monopolist Test (HMT), which examines whether or not a small but significant non-transitory increase in price (SSNIP) by a monopolist would be profitable. The HMT works well in one-sided, or linear, markets but faces a particular challenge in two-sided platform markets: how much of the price rise is passed through from one side of the platform to the other and what effect would that have on consumer switching?