Vertical Restraints in Global Digital Markets

Abstract

Vertical restraints applied by major operators of digital markets have become a serious challenge for international regulators and governments of leading world powers in recent years. Having new specific features in comparison with the restraints in force in traditional sales channels, they can lead to a rapid strengthening of the market power of dominant online platforms and to the subsequent monopolization of markets. The article is devoted to the study of business practices of applying various types of vertical restraints in global digital markets. Using the example of global leading companies (Apple Inc., Amazon, Booking.com., Microsoft, etc.), the market consequences of the introduction of exclusive and related contracts, cross-platform parity agreements, as well as a wide range of transaction bans are demonstrated. In particular, suppliers and dealers are significantly limited in their ability to sell competing products and brands and list them on major online marketplaces. Bans are introduced on the use of Internet sites for price aggregation and comparison, as well as certain e-commerce platforms and certain types of payment means. At the same time, there are significant penalties for non-compliance with the terms of vertical contracts. Buyers and users are limited by the possibilities of using software products of independent developers, connecting to competing online services. Technological solutions are being introduced that increase the costs of sharing hardware and software of competing operators. And such solutions are greatly simplified in the conditions of existing “closed” global digital ecosystems. It is shown that the norms of vertical contracts of major market players are able to effectively eliminate the cost advantages of both existing operators and new firms, significantly increasing the entry costs and reducing potential of entering firms to attract the target audience at the start of activity. The most vulnerable here are, first of all, small highly specialized companies using low-budget business models. The author proposes a theoretical model that reveals the mechanism that prevents new firms from achieving the minimum effective sales volume. Using the example of the distributor’s retail price control strategy, it is proved that the use of vertical contracts allows both increasing the profits of existing operators and successfully preventing potential competitors from entering the market. At the same time, it is noted that the use of vertical restraints contributes to solving a number of current business problems of large digital companies: effective protection of investments in the development of e-commerce channels, limiting the turnover of counterfeit products, deepening the differentiation of market supply, reducing the risks of price wars and leveling the actual “stowaway problem”. Therefore, the qualification of vertical restraints as good practices, or as abuses of market power, should be based on an analysis of the objectives of such restraints and a comprehensive assessment of their potential consequences. An important step towards solving this complex and very sensitive problem may be the adoption of the Digital Markets Act by the European Parliament in 2023.