[By Akanksha Agrahari & Arjun Nayyar]
The authors are students at the NALSAR University of Law, Hyderabad.
Introduction
WhatsApp was heavily featured in the news recently when the Competition Commission of India took suo moto cognizance of the updated privacy policy and terms of service for its users. Due to its extremely large user base, as well as the network effects associated with it, the Commission held that users were left with no other option but to accept the updated conditions. Hence, Whatsapp’s actions were found to be in prima facie abuse of its dominant position, a view which was upheld by the Delhi High Court. It raises certain concerns regarding the dominant position held by companies by virtue of their ability to manipulate consumer behaviour. This isn’t a unique instance wherein WhatsApp was called into question for its ability to influence the market and its users. Previously, WhatsApp was fined 3 million Euros by the Italian Competition Authority for abusing its dominance. This post analyses various concepts of behavioural economics using which competitors can obtain a dominant position and influence their user base.
Understanding Behavioral Economics
The CCI has on many instances discussed factors that compound a firm’s dominance in the market and lead to an abuse of its dominant position. The order in the WhatsApp case follows an extensive analysis of network effects and how they have led to the app reaching a position where it is difficult for the users to switch to any substitutes. Such companies use certain tactics and human tendencies to build a user base and subsequently abuse it. This dependence of the consumers on one platform may lead to a denial of market access to competitors.
Network Effects of Scale and Tipping
The larger the consumer base of a platform, the more inclined a consumer would be to use it. Network effects relate to an increase in the desirability of a platform due to an increase in the number of users. The CCI has looked at network effects in the past to understand whether or not a competitor holds a dominant position, and subsequently, to determine whether this position has been abused. This concept is amplified in the relevant market of over-the-top (OTT) messaging apps, benefitting WhatsApp the most with 70 million users in the country, or a market share of 95%. Such a large user base allows WhatsApp to function mostly independently of market forces, due to the lack of feasible substitutes and the hesitation of users to switch.
As the updated terms of use and privacy policy of WhatsApp does not allow for the user to opt-out, any individual who disagrees is left with the sole option of uninstalling the app. However, due to the nature of OTT messaging apps, it is not sufficient for users to simply delete WhatsApp and switch to other competing apps. It is also necessary to ensure that other users make the switch as well, to make the alternative a viable substitute. This creates a barrier to the efficient substitutability of the application, preventing the users from refusing to conform to the updated conditions and the alleged breach of their privacy. Such a barrier to entry is anti-competitive practice and is said to have an appreciable adverse effect on competition under Section 19(3) of the Competition Act.
The EU has dealt with network effects as a reason for dominance on various occasions. In the Booking.com case, it was remarked that network effects may cause markets to tip towards a particular competitor. It was further stated that once a particular threshold is crossed, these network effects might lead to a major barrier to entry for competitors.
This ties into the aspect of “tipping”, whereby the market tips in favour of a leading firm due to an increased market share. On reaching such a tipping point, firms can rely on their large user base to consolidate even more users. Large players are protected from competition and market forces due to their dominance and subsequent barriers to entry, allowing them to make decisions and impose policies that would otherwise cause a loss in business if the market was competitive.[i] The EU also extensively discusses the concept of tipping. It states that cases dealing with anti-competitive practices must be brought to the commission’s notice before companies can abuse such a dominant position.
Consumer Inertia
Consumers tend to opt for the default option or the option that is readily available. This aspect is abused by dominant firms by virtue of the ‘inertia’ of consumers.[ii] Having used a platform for a considerable amount of time, consumers lack any incentive to switch to another option. Moreover, the habit formation of using a particular app over a period of time puts the average consumer in a state of inertia. Google reportedly pays USD 1 billion to Apple to be the default search engine on the iPhone. This illustrates the importance of default options and the inertia generated for them to the firms.
Consumer inertia is also known as the status quo bias. The concept was extensively discussed in the EU in the Google Android Case, and has also been held by the CCI to be sufficient grounds to raise a prima facie case of abuse of dominance. It entails that those individuals who already have access to a particular platform or application on their mobile devices would have no incentive to switch to competing apps on the market. This concept is witnessed to an even greater extent in the WhatsApp case, as not only do the users already have the application on their smartphones; they also utilize it on a daily basis. It would be highly inconvenient for consumers to switch to another app if they disagree with the updated privacy policy and would be much more likely to accept the conditions despite having their differences. This is coupled with the network effects discussed earlier, as the status quo bias would only amplify when multiple users have to switch in order for any substitute to be considered viable, further enforcing the dominant player’s hold over the market.
The Nudge Theory
Tech companies often use a behavioural tactic called “nudging” to further their popularity and profits. The Nudge Theory was explained by the Nobel Economics Prize winner Richard Thaler and Cass Sunstein.[iii] It suggested that a consumer would always give preference to the immediate benefit in comparison to their welfare in future. Thus, the consumer is most likely expected to click on, download, and explore the first option available to them, rather than spending time and effort in exploring more options and thinking of long-term benefits. While nudging might not directly be applied in the WhatsApp case, it is relevant in determining how large players manipulate consumer behaviour.
An interesting instance of nudging was seen in the European Google Shopping Case. Google was found to have abused its dominant position in the relevant markets for general search services as it engaged in “nudging”. It would position and display its own comparison shopping service in its general search results pages, putting the competing comparison shopping services in a disadvantaged position. The Commission analysed the influence of such nudging and concluded that users tend to click more on those links which are more visible on the general search results page. Thaler’s findings that while searching for a solution to a particular problem, the consumer is most likely to click on the first link they see rather than searching on another page or scrolling down, is apt here. Google was fined €2.42 billion by the Commission.
In the Indian context, nudging techniques have been noticed in the case of XYZ v. Alphabet Inc. &Ors. Google was alleged to engage in search advertisement manipulation in favour of Google Pay. The CCI noted that ‘self-preferencing’ by dominant firms may work as a potent instrument to divert traffic to apps profitable for the firm, thereby interfering with the process of ‘competition on the merits. Such ‘self-preferencing’ is a nudging tactic used by a firm to influence consumers’ behaviour. It is an anticompetitive practice as it allows the firms to unfairly take advantage of their market power to promote their own products, at the cost of equal access for competitors. CCI stated that such a practice can violate Section 4 of the Act if it is found to be providing undue advantage to a specific app at the risk of other competing apps.
The Way Forward
The discussed network effects, and concepts of tipping, inertia, and nudging paint a picture that shows the vast power and competitive freedom enjoyed by large players in their respective relevant markets. This position is often abused to further strengthen their hold over the market, leading to practices that are harmful for competition as well as for the users.
The CCI must take cognizance of dominant players in their markets proactively, specifically in light of the policies they make and how these policies would affect their consumers. The WhatsApp case is a step in the right direction, however, a lot more vigilance is necessary to ensure that there is not a widespread abuse of dominance by firms that are backed by vast resources. Standards adopted by the EU and their approach towards aspects of behavioural economics can be relied on as a useful framework to structure future actions.
[i] Özlem Bedre-Defolie & Rainer Nitsche, When Do Markets Tip? An Overview and Some Insights for Policy, 11 Journal of European Competition Law & Practice (Dec 2020), https://academic.oup.com/jeclap/article/11/10/610/6040005.
[ii]Unlocking Digital Competition, Report of the Digital Competition, Expert Panel, March 2019, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf at page 36.
[iii]Richard H. Thaler & Cass R Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness, New Haven: Yale University Press (2008).