Mi Mercado Es Su Mercado: The Flawed Competition Analysis of Mexico’s COFECE

Cite this Article
Mario Zúñiga and Geoffrey A. Manne, Mi Mercado Es Su Mercado: The Flawed Competition Analysis of Mexico’s COFECE, Truth on the Market (March 12, 2024), https://truthonthemarket.com/2024/03/12/mi-mercado-es-su-mercado-the-flawed-competition-analysis-of-mexicos-cofece/

Mexico’s Federal Economic Competition Commission (COFECE, after its Spanish acronym) has published the preliminary report it prepared following its investigation of competition in the retail electronic-commerce market (e.g., Amazon). The report finds that: 

there are elements to preliminarily determine that there are no conditions of effective competition in the Relevant Market of Sellers and in the Relevant Market of Buyers, as well as the existence of three Barriers to Competition that generate restrictions on the efficient functioning of said markets. (Emphasis added).

The alleged barriers consist of:

  1. “Artificiality” in some components of marketplace loyalty programs (services embedded in loyalty programs that—without being directly linked to the marketplace’s ability to carry out or facilitate transactions between buyers and sellers, and coupled with “network effects”—affect buyers’ behavior);
  2. “Buy Box opacity” (sellers don’t have access to the ways that Amazon and Mercado Libre choose the products that go into the Buy Box); and
  3. “Logistic solutions foreclosure,” because Amazon and Mercado Libre (the most popular e-commerce site in Latin America) don’t allow all logistics providers to access their APIs, but rather bundle marketplace services with their own fulfillment services.

To eliminate these alleged barriers, the report proposes three remedies, to be applied to Amazon and Mercado Libre:

  1. An obligation to “disassociate” streaming services from membership and/or loyalty programs (e.g., Amazon Prime), as well as any other service unrelated to use of the marketplace (e.g., games and music, among others);
  2. An obligation to carry out all actions that are “necessary and sufficient” to allow sellers to freely adjust their commercial strategies with full knowledge of the Buy Box selection processes; and
  3. An obligation to allow third-party logistics companies to integrate into the platform through their respective APIs, and to ensure that Buy Box selection doesn’t depend on the choice of logistics provider unless it affects “efficiency and performance criteria.”

We see at least three fundamental flaws with the report.

An Unreasonably Narrow Definition of the Relevant Market

Rather than an “abuse of dominance” procedure, the market investigation that led to the report was a “quasi-regulatory procedure.” But the wording of Article 94 of the Mexican Federal Economic Competition Act (under which the investigation was authorized) strongly suggests that COFECE has to establish (not simply assert) an “absence of effective competition.” This would entail either that there is a “market failure” that impedes competition, or that there is an economic agent with a dominant position. The report tries to follow the second option, but we think it does a poor job. 

To determine if any given company has a “dominant position” (monopoly power) competition agencies must first define a “relevant market” in which the challenged conduct or business model has an effect. Although it is common for antitrust enforcers to define relevant markets narrowly (often, the smaller the market, the easier it is to find that the hypothetical monopolist is, in fact, a monopolist), COFECE has gone too far in this case. 

The Mexican competition watchdog regrettably follows the bad example of its American counterpart, the Federal Trade Commission (FTC). As one of us has explained in a post about the FTC’s recent monopolization complaint against Amazon, the agency:

describes two relevant markets in which anticompetitive harm has allegedly occurred: (1) the “online superstore market” and (2) the “online marketplace services market.” Because both markets are exceedingly narrow, they grossly inflate Amazon’s apparent market share and minimize the true extent of competition. Moreover, by lumping together wildly different products and wildly different sellers into single “cluster markets,” the FTC misapprehends the nature of competition relating to the challenged conduct.

COFECE does something similar in its report. By alleging that these large online marketplaces “have positioned themselves as an important choice,” the agency appears to feel free to ignore competition from other online and offline retailers. Again, while it’s possible the full report will offer a deeper explanation (and evidence), COFECE’s report appears to ignore other e-commerce platforms—like China’s Shein and Temu—that have gained both popularity and advertising-market share. The report also neglects to mention e-commerce aggregators like Google Shopping, which allow consumers to search for almost any product, compare them, and find competitive offers; as well as competition from e-commerce websites owned by sellers, such as Apple or Adidas

It also appears to ignore that consumers can switch to brick-and-mortar retailers should Amazon or Mercado Libre try to exploit their market power. Of course, how many consumers might switch, and the extent to which that would affect the marketplaces, are empirical questions. But there is no question that some consumers might switch (and remember, competition happens on the margins; we don’t need all consumers to switch to affect a company’s sales).

The report does mention selling through social media, but does not include it in the relevant market. How can we disregard social media as a reasonable substitute for Amazon and Mercado Libre if 85% of small and medium enterprises turned to Facebook, Instagram, and WhatsApp during the COVID-19 pandemic to advertise and sell their products?

There is empirical evidence that Amazon not only competes, but competes intensively with other distribution channels, and has a net-positive welfare effect on Mexican consumers. A 2022 paper (Campos Vázquez et al., “Amazon’s Effect on Prices: The Case of Mexico”) found that:

e-commerce and brick-and-mortar retailers in Mexico operate in a single, highly competitive retail market

And that:

Amazon’s entry has generated a significant pro-competitive effect by reducing brick-and-mortar retail prices and increasing product selection for Mexican consumers.

The paper finds the market entry of products sold and delivered by Amazon gave rise to price reductions of up to 28%. How is that not competition? 

As if this narrow definition were not bad enough, the report conflates Amazon and Mercado Libre’s market shares, to conclude that:

Amazon and Mercado Libre are the economic agents that have the largest market share; together, both hold more than 85% of the sales and transactions in the Relevant Seller Market during the period analyzed and the HHI exceeds two thousand points. Likewise, in the Relevant Buyers Market, the HHI was estimated, for 2022, at 1,614 units and the main three participants concentrate 61% (sixty-one percent) of the market. In both markets, the other participants have a significantly smaller share.

Why combine the market share of Amazon and Mercado Libre, as if they were acting as a single economic agent? Given this market definition, are Amazon and Mercado Libre not at least competing with each other? Unsurprisingly, the market’s continuous growth and the evolution of the companies’ respective market shares indicate that they do

It is only on the basis of this distorted depiction of the market that COFECE jumps to the conclusion that Amazon and Mercado Libre have the power to fix prices (another way of saying that they have “market power”).

Questionable ‘Barriers to Entry’ and Faulty Assessments of Marketplace Competition

Suppose we accept COFECE’s definition of the relevant market. Even if Amazon and Mercado Libre have significant market share, they could face competition from new entrants attracted by the higher prices (or other “exploitative” conditions) charged to consumers. According to COFECE, alas: 

There are barriers to entry related to the high amounts of investment for the development of the marketplace, as well as for the development of technological tools integrated into it…. In addition, high investment amounts are required related to the development of logistics infrastructure and in working capital related to funds necessary to cover operating expenses, inventories, accounts receivable and other current liabilities.

There are barriers to entry related to considerable investments in advertising, marketing and public relations. To attract a significant number of buyers and sellers to the platform that guarantees the success of the business, it is imperative to have a well-positioned, recognized brand with a good reputation.

These are costs, not “barriers to entry.” As Richard Posner explained long ago in his treatise “Antitrust Law” (at 73-74), the term “barrier to entry” is commonly used to describe any obstacle or cost faced by entrants. But by this definition (embraced by COFECE, apparently), any cost is a barrier to entry. Relying on George Stigler’s more precise definition, Posner suggested defining a barrier to entry as “a condition that imposes higher long-run costs of production on a new entrant than are borne by the firms already in the market.” In other words, properly understood, a barrier to entry is a cost borne by new entrants that was not borne by incumbents.  

Of course Amazon and Mercado Libre have advantages over other firms in terms of their infrastructure, know-how, scale, and goodwill. But those advantages didn’t fall from the sky. Amazon and Mercado Libre built them over time, investing (and continuing to invest) enormous amounts to do so.

A digital platform does not need to invest in all of those things, all at once, everywhere, before entering a new market. Any firm with a sufficiently interesting or beneficial idea could enter the market and gain traction, as the above-mentioned examples of Shein and Temu demonstrate.

Proposed Remedies Would Harm Consumers, Rather than Benefit Them

Even if we were to accept COFECE’s suggested market definition and its assessment of market power, the report’s proposed remedies—which could be summarized as the mandated unbundling of Amazon’s and Mercado Libre’s streaming services from their loyalty programs (like Amazon’s Prime) and to make (at least part of) their platforms “interoperable” with other logistic services—would harm consumers, rather than benefit them. 

Amazon Prime provides consumers with many attractive benefits: access to video and music streaming; special deals and discounts; and last, but not least, two-day free shipping. According to COFECE, “this is an artificial strategy that attracts and retains buyers and, at the same time, hinders buyers and sellers from using alternative marketplaces.”

It’s not entirely clear what “artificial” means in this context, but it appears to imply something outside of the bounds of “natural” competition. Yet what COFECE describes is the very definition of competition. 

A mandate to unbundle streaming services would actually degrade the experience enjoyed by consumers, who would instead have to contract and pay for those services separately (see here and here). The independent provision of such services would not benefit from Amazon’s economies of scale and scope and would, therefore, be more expensive. And providing more benefits for consumers at a given price is what we want competitors to do. Identifying consumer benefit as a harm turns competition enforcement—and, indeed, the very notion of competition itself—on its ear.

On the other hand, the report also proposes to mandate opening the Buy Box and modifying its rules to be neutral to all logistics providers. To mandate that such providers be allowed to offer their services at Amazon or Mercado Libre amounts to considering these platforms as “common carriers,” much like the old telephone networks of the 20th century (see, relatedly, here). This classification and the rules that follow from it (neutrality and price regulation, among others) was designed for markets with natural monopolies, where competition is not possible—even undesirable.

Digital platforms are much more competitive. In this context, common-carrier rules would only create free riding and negative incentives for investment and innovation (by both incumbents and new entrants). Sellers and logistics providers have many other options to access consumers. There is no economic or legal justification to mandate their access to Amazon or Mercado Libre’s platforms. 

In sum, COFECE’s bad analysis leads to even worse remedies. Such remedies would not promote competition in Mexico and would not benefit consumers. Thankfully, this report is only a recommendation, and COFECE commissioners will have the chance to deviate from its conclusions. For the sake of Mexico’s consumers, let’s hope they correct course.