This post has been written by Founding Editor Saarthak Jain.

One of the most remarkable developments with the advent of the internet has been the cropping up of zero-price markets, and their increasing importance to the world economy. Despite their growing presence, competition regulators have largely overlooked these markets, as being beyond the application of competition law. In this post, I seek to analyse the challenge to conventional competition analysis posed by zero-price markets.

Background

Zero-price markets have become a common occurrence in the 21st century. Some of the most successful businesses such as Facebook, Google, Dropbox and Wikipedia provide free services to atleast a portion of their customer base.

Such markets have been a source of confusion for competition regulators and courts. This is because modern competition theory is firmly based on neoclassical economics which which assumes prices to be an essential component of any market. For instance, a U.S. Federal Court concluded that it is not possible to subject free goods or services to antitrust scrutiny. In this background, it is essential to study the features of these markets and to assess if they can be brought within the ambit of competition law.

Are Zero-Priced Goods Really Free?

While trying to avoid competition regulations, companies have relied on the idea that zero-priced products are free to customers, and therefore accrue no competitive advantage. However, there are several hidden costs associated with such products which need to be taken into account. These may be in the form of information and attention costs. For instance, some firms provide free services in return for the data of the consumer which can be exploited commercially at a later stage. Similarly, attention costs exist in two-sided markets, such as the newspaper industry, where greater circulation among customers results in higher advertising prices from the other end. Use of “freemium” models that seek to attract users at a trial stage before the launch of the product also entail such costs. Therefore, zero-priced markets lead to indirect costs that the consumers might not be able to properly evaluate.

Thus, there is no ground to grant an exemption to zero-priced markets from the rigours of competition law. This is especially crucial since zero-prices can create barriers to free competition in certain markets.

Competition Concerns

Zero-priced products can cause a massive impact on competition and consumer welfare. The effects would be different based on the characteristics of the market under consideration.

One of the most popular example of free goods, are those which are bundled with other goods sold at a positive price. This is especially seen in technological ties, such as Microsoft’s integration of its free Internet Explorer web browser to its paid Windows operating system, or Apple’s free iTunes software being bundled with its paid digital music via iTunes Store. In these cases, the offer of free goods might have an exclusionary effect, making it difficult for new firms to enter the market where either of the two goods is sold without entering the other market as well. Additionally, the reluctance of consumers to spend on a good that was previously available for free strengthens its impact.

Issues may also arise with regards to the unbundled free-standing goods. The most common zero-price markets are two-sided which can afford to provide benefit to one set of consumers at zero price due to the revenue generated from the other users. An example of this is the free daily newspaper industry in USA and Europe, which provides free copies to its readers due to the rising revenues from advertisers. In such markets, a new firm would find it difficult to beat free goods by merely lowering prices. Additionally, a new entrant would not be able to easily build up an advertiser base willing to pay them, due to the lack of sufficient consumers utilizing the good/service at the other end (therefore, a new newspaper’s advertising revenue would be comparatively lesser as compared to a well-established newspaper with wide circulation).

Zero-price markets can adversely impact the welfare of consumers.  For instance, a free newspaper would be beneficial to the extent that the consumer would not be required to pay money and buy another one. However, a newspaper requiring a paid subscription may be focusing on extended research and in-depth journalism, that would be lacking in the free newspaper. However, these long-term considerations are likely to be ignored by consumers due to the “deception of a free good”, thereby leading to a low level of quality in the market.  Since these costs are largely indirect, consumers might not be aware of them. Therefore, these considerations make a strong case for effective regulation of zero-price markets.

Possible Regulatory Responses

As the above concerns highlight, regulation of zero-price markets is essential to avoid anti-competitive behaviour. There are several key areas which require responses.

The most fundamental issue is the refusal to acknowledge the existence, or even the mere possibility, of harms arising from the functioning of zero-price markets. The failure to understand that consumers exchange information and attention in return for the good/service can lead to incorrect outcomes. In light of the Cambridge Analytica scandal, harms such as privacy degradation, threats to democracy and lack of media diversity need to be taken into consideration while analyzing competition concerns. Presently, competition regulators across the globe have been unable to conceive zero-price markets as relevant competitive markets due to their price-focused outlook towards competition.

Further, attempts at monopolization in such markets need to be regulated. Free goods have the potential to increase the pace of expansion in a market, especially where the market is characterized by network effects. The combination of free service and network effects makes entry distinctively difficult. In such a scenario, regulatory response must be quick and efficient. Earlier this year, European authorities fined Google a record $5.1 billion for abusing its Android market dominance. Although Android’s anti-competitive practices were recognised in as early as 2014, it took 4 years to take action, thereby allowing competition problems to worsen.

Conclusion

“Free” products are not really free. Further, companies like Google are surely not immune from the temptation to stifle competition. Consumers pay for such products with attention to advertisements and by giving away personal information. These are market exchanges even if consumers fail to recognise them as such.

Conceptually, competitive concerns in zero-price markets are similar to those in positive-price markets. It needs to be acknowledged that free services on one side of the market can drive out rivals and push towards a single dominant firm. These factors call for a strict application of competition law to zero-price markets.