Turkish Competition Board’s Sahibinden.com Decision

January 2019 Elif Mungan
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Introduction

In the Competition Board’s decision dated 01.10.2018 and numbered 18-36/584-285, it was considered whether Sahibinden Bilgi Teknolojileri Paz. ve Tic. A.Ş. (“Sahibinden.com”) violated Article 6 of Law No. 4054 (“Law No. 4054”) on the Protection of Competition by means of excessive pricing in the market for online platform services, for renting/selling vehicles and real estate (“Decision”)[1].

The investigated undertaking, Sahibinden.com, is an online platform where one can submit their notices and advertisements for real estate, as well as for many other areas. Sahibinden.com is a paid service for those who sell through the platform. However, it does not charge fees for any sales made through Sahibinden.com.

As a side note, in the preliminary investigation conducted in 2014 on Sahibinden.com, it had also been examined whether Sahibinden.com violated Article 6 of Law No. 4054 by way of determining excessive corporate membership fees. In its decision, the Competition Board stated that even if high prices were implemented in this dynamic sector, given that these high prices would enable the undertaking to get its investments’ worth back, encourage new entrants to the market, and make it possible for existing undertakings in the market to reach potential customers more easily, it would mitigate the negative consequences of network effects on the competition in the market. In the final analysis, the Competition Board concluded this would have a positive result in terms of competition, and decided not to launch an investigation against Sahibinden.com. However, at this point, it is evident that some of the evaluations of the Competition Board have been altered.

Definition of the Relevant Market

In the Decision, the relevant product market was defined as “the market for online platform services for selling vehicles and online platform services for renting/selling real estate;” whereas, the relevant geographical market was defined as “Turkey.” Since the relevant product market definition is critical for the determination of dominant position, we are of the opinion that the following assessments in the Decision are noteworthy:

  • The market in which Sahibinden.com operates is broadly defined as a multilateral platform services market.
  • The value of a platform is determined by the participation of the decision-making unit groups that wish to benefit from the commercial interaction opportunities offered by the platform (networking effects). As more members of economic decision-making groups join the platform, the value of the platform increases, thus increasing the price-setting power of the platform service provider.
  • While there are exceptions, in general, multilateral platforms offer free or low-cost (below-marginal-cost) services to end-users, while serving at relatively high prices (over-marginal-cost) to decision-making units that provide goods and/or services to final consumers through the platform. Sahibinden.com also implements this pricing strategy.
  • The pricing strategy enables cross-platform competition by increasing the possibility of the end-users (those who target to acquire the service provided through the platform) to change the platform they use, or to use multiple platforms at the same time.
  • A platform becomes dominant in the relevant market mainly due to positive network externality, horizontal and vertical product differentiation methods practiced by the platform, and the characteristics of the market where the platform services are offered.
  • There are at least two groups of decision-making units in the multilateral platform service markets that would like to establish commercial relations with each other through the platform, and there is a positive network effect between these decision-making units (changes in the value attributed to the platform by one side, which affects the other side in the same direction). For this reason, it is necessary to take into account the reaction of multiple decision-making units at the point of drawing the boundaries of substitutable products or geographical borders.
  • In the definition of the relevant product market, Sahibinden.com should be examined in terms of supply-side substitutability; whereas, in terms of demand-side substitutability, the behavior of undertakings that provide goods/services (car dealers, real estate offices, etc.) and the behavior of end-consumers demanding goods/services should be examined by also taking into account the interactions between the two.
  • In the decision, in terms of the supply-side substitutability, it is stated that undertakings such as Sahibinden.com, Tasit.com, Arabam.com will not be taken into account given that they have no tendency towards providing alternative services due to their business plans/structures. In terms of demand-side substitutability, car dealers’ and real estate offices’, as well as the consumers’ (who seek to buy/rent and cars/real estate) reaction to the change in the price and/or quality of the service offered through the platform should be taken into account.
  • Offline platforms have not been included in the market despite Sahibinden.com’s counter arguments. For this purpose, it is stated that if the price level of the platform increases, or if the quality level of the platform decreases, the option for substitution will be the other online platforms that function in the same manner.

Excessive Pricing

“Excessive pricing,” which is the violation type examined in the Decision, is considered to be the price that a dominant undertaking cannot implement under competitive conditions, and is significantly above the economic value of the products/services it offers.

It is observed that the “Economic Value Test” (“EVT”) forms the basis of the applications utilized for the determination of the excessive pricing, and the methods developed later are based on the basic framework drawn by the EVT. In the first phase of the EVT, which is a two-stage test, the price and cost of the products/services are compared. In the second stage, the examined price is compared to itself, or to the prices of competing products/services. The EVT is a method that is criticized in many ways as discussed in the Decision.

In accordance with the Decision, the Competition Board takes the concept of economic value as a basis that is in line with the European Union practices in the determination of excessive pricing, and gives priority to the price comparison in its evaluations. The Board resorts to the cost calculation only in cases where the cost can be clearly and undoubtedly determined, and this approach is considered to be lawful by the Council of State of Turkey.

Dominant Position

It is necessary to first determine that the undertaking is dominant in order to conclude whether there is an excessive pricing violation. In this context, whether Sahibinden.com held the dominant position in the defined markets is evaluated in terms of its market share in the relevant markets, as well as other market data and entry barriers. In the Decision, it is determined that Sahibinden.com is dominant in the relevant markets by referring to the following points:

  • com has high market power in the relevant markets. In the demonstration of Sahibinden.com’s position in the market, data pertaining to price, number of visits, number of corporate memberships and income from corporate members was utilized.
  • Barriers to entry in the relevant markets are primarily networking effects, and sunken costs arising from the networking effect. The networking effect is the determination of the value of the platform by the decision-making units that wish to take advantage of the commercial interaction opportunities offered by the platform, and are influenced by each other’s preferences. Undertakings entering the market later on will have to allocate a serious advertising and promotional budget in order to overcome the entry barriers and to add value to their platforms. In this regards, multi-homing costs (i.e. costs of operating in multiple platforms) were also taken into account in this context. In addition, the importance of the value of the name of “Sahibinden” in consumer preferences and the wide range of services offered by Sahibinden.com are defined as barriers to entry to the market for existing and potential competitors. We observe that the Competition Board has also defined the networking effect in its previous decisions, such as com[2].

Excessive Pricing Assessment

In the assessment of excessive pricing, the margins of prices, price increase rates, market share differences and the differences between prices and costs of Sahibinden.com and its competitors in the relevant markets were examined.

As a result of the calculations, it was evaluated that Sahibinden.com implements prices that would not be observed in the competitive markets, and that the existing competitors in the relevant market did not create any competitive pressure that could affect this pricing behavior. In addition, the presence of entry barriers in the relevant markets also hinders any potential competitive pressure. Therefore, it is determined that neither of the two markets is capable of self-correction in the short and medium run. Therefore, the pricing behavior of Sahibinden.com for the period of 2015-2017 was found to be excessive and, thus, violated Article 6 of Law No. 4054. At this point, it is stated that in order to for this violation to cease, the price increases are expected to be made at reasonable levels that can be explained by cost increases.

The Competition Board rejected the detailed defense of Sahibinden.com where it was indicated that the prices of Sahibinden.com were not high, that the prices could not be considered as excessive prices, and that implementation of the EVT was not accurate.

Conclusion

As a result of the Decision, the base monetary fine imposed on Sahibinden.com took into account the “other violations” category as defined under the Regulation on Fines[3]. In addition, as the infringement lasted for more than one year, the rate determined was aggravated, and no reduction was applied to the amount determined. As a result, it was decided that Sahibinden.com violated Article 6 of Law No. 4054 by imposing excessive prices in the markets for online platform services for vehicle and real estate sale/rental services, and an administrative monetary fine of TL 10,680,425.98 was imposed on the undertaking. The Decision includes one dissenting opinion.

The Decision is important to evaluate the excessive pricing allegations in a two-sided market. In this sense, we believe that the Decision provides guidance in terms of the manner in which competition authorities intervene in excessive pricing behavior, and in terms of the characteristics of multilateral platforms.

[1] Competition Board’s Sahibinden.com decision, 01.10.2018, No. 18-36/584-285, https://www.rekabet.gov.tr/Karar?kararId=8a58df07-f31b-457e-b936-9fa3afd5fdbf (Access date: 28.01.2019).

[2] Competition Board’s Booking.com decision, 05.01.2017, No. 17-01/12-4, https://www.rekabet.gov.tr/Karar?kararId=d2bfb2c8-e517-498a-9542-07e3cad8a419 (Access date: 28.01.2019)

[3] Regulation on Fines to Apply in Cases of Agreements, Concerted Practices and Decisions Limiting Competition, and Abuse of Dominant Position promulgated, OG, 15.02, 2009, No. 27142.

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