Platform functionality that gathers massive amounts of data in one place in a user-friendly format is extremely useful. For example, an online retail platform allows us to easily find the product we want at the lowest price without having to physically go around different stores.
On the other hand, stores can significantly shorten the distance between themselves and the consumer. This is a particularly great advantage for Small and Medium Enterprises (SMEs) with limited capital and regional companies located away from the consuming area, since it enables them to promote their products to consumers themselves without incurring advertising expenses. Platforms unconstrained by geographical space that match up consumers and companies listing their products on the site may be said to be truly innovative.
However, there is a growing demand worldwide for the regulation of platform companies that are the driving force behind such innovation. Two points of contention arise in this regard.
One is the issue of personal data. In the United States, Facebook has leaked large volumes of personal information to other companies without the consent of the individuals concerned. In Japan too, a survey conducted by The Nikkei and others revealed that half of the major 100 companies that operate websites targeted at consumers have shared browsing history data without specifying to whom the information has been provided.
Consideration should be given to reviewing the Act on the Protection of Personal Information and applying the abuse of superior bargaining position in the Antimonopoly Act to consumer transactions, so as to ensure that consumers are not treated improperly by platform companies when it comes to personal information and other data.
The other point of contention concerns the business practices of platform companies. This can be observed in two cases of on-site investigations by the Fair Trade Commission in April: major travel websites, and the behavior of Amazon Japan, which revealed its policy of requiring the costs of its reward point plan to be shouldered by sellers (the FTC later terminated the investigation when the firm withdrew the plan). I will discuss this point of contention with reference to the example of online retail platforms.
The major difference between online retail platforms and traditional retailing is the way in which purchasing data is stored. In the case of traditional retailing, stores have a direct point of contact with consumers, so they can hold primary data on who bought what and when.
In the case of online retail platforms, on the other hand, consumers purchase and pay on the platform, so the primary data relating to purchases is collected by the companies that operate those platforms. Companies listing their products on the site receive information from the company that operates the platform.
In other words, in traditional retailing data collection is decentralized, while in online retail platforms data is centralized in platform companies.
It is more economical to enlarge the scale by connecting data. For example, by connecting purchase history, a consumer’s preferences can be understood and products that are considered deemed suitable for that person can be ranked at the top of their search results.
When the cost of connecting and analyzing data is greatly reduced as a result of advances in cloud computing and AI technology, online retail platforms that centrally store data differ significantly from traditional retail businesses in terms of efficiency. Many companies attract consumers by listing their products on online retail platforms. As more consumers visit the site, yet more data is collected, further streamlining the platform and encouraging more companies to list their products.
This network effect results in increased sales for online retail platforms and becomes a convenient platform for both consumers and companies trading online. In other words, online retail platforms tend to be more streamlined and monopolistic than traditional retailers.
If it were a matter of streamlining alone, there would seem to be no adverse effects of platform monopolies on information. Business practices too are unlikely to be an issue, particularly when platforms are still small, when their priority is the presence of many companies listing their products on the sites. The problem arises when platforms become large and companies are corralled based on information advantage, causing them disadvantage.
According to a survey conducted by the FTC released on 17 April 2019, around 70% of companies listing their products on online retail platforms are unilaterally subjected to different rules by platform companies, highlighting the plight of SMEs that have no choice but to accept unreasonable demands.
Failure to comply with the demands of platform companies may lead to SMEs being disadvantaged in terms of search results and product rankings in the online retail platform, or a loss of sales to platform companies offering identical or similar products (see figure).
Since companies listing their products are indispensable for online retail platforms, excessive corralling is also inconvenient for platform companies. The optimal strategy is to squeeze the companies listing their products without making them suffer unduly.
Discussions are advancing to improve the trading practices of platform companies. The fundamental principles for rule making were announced at the government’s Council on Investments for the Future in December 2018, and a summarized proposal by a joint investigative commission of the Ministry of Economy, Trade and Industry, the FTC, and the Ministry of Internal Affairs and Communications proposed by the Liberal Democratic Party’s Research Commission on Market Competitiveness Policy in April 2019.
In their comments, both the government and the ruling party stated that the trading environment of platform companies can be improved considerably by firmly enforcing the law based on the framework of the current Antimonopoly Act. In fact, the FTC’s on-site investigation of major travel sites and Amazon mentioned above were observed to be a deterrent to the violation of the Antimonopoly Act.
However, the amount of time required for examination under the Antimonopoly Law is often substantial, and new measures are required to remedy this in a timely and effective manner. Here, I would like to touch on two points.
One is the need for regulations to promote transparency and fairness in the digital market. It is generally difficult for a third-party who is privy to less information to prove unjust conduct on the part of the platform company that has an information advantage. While the voluntary initiatives of platform companies are to be commended, the government should be involved in efforts to ensure the effectiveness of those initiatives.
Such efforts would also be effective in addressing problems experienced by consumers through the growing number of platforms. In order for consumers and SMEs to participate in transactions safely and securely, platform companies in Japan and abroad should be encouraged to change their behavior to proactively improve the trading environment.
A further measure required is an organizational review to speed up the response of competition authorities to the digital field. Currently, the functions of competition authorities are forming organizational silos both through policy making and law enforcement. Forming such organizational silos may be appropriate if the aim is to enforce the law to the same degree regardless of industry differences. However, in Japan where population decline and globalization are advancing simultaneously, needs and reasons are growing for reflecting law enforcement to the different environment of each industry.
An organization that can consistently manage information from policy making to law enforcement in each major sector, including the digital sector, will be effective in enhancing both human resource expertise and speedy enforcement of the law.
Policy makers are facing various kinds of issues including digital taxation and the application of domestic laws to platform companies as well as overseas business operators. What is needed is wisdom and ingenuity in working with platforms as a driver of Japan’s economic growth based on close international cooperation.
Translated by The Japan Journal, Ltd. The article first appeared in the “Keizai kyoshitsu” column of The Nikkei newspaper on 5 May 2019 under the title, “Kyodai IT kigyo to kyoso seisaku (3): Dejitaru shijo no kiritsuka isoge (Corporate IT giants and competition policy (3): Speeding up the regulation of the digital market).” The Nikkei, 5 May 2019. (Courtesy of the author)