Restricting Self-Preferencing in Digital Markets May Do More Harm Than Good: UMD Smith Researcher

COLLEGE PARK, Md., Sept. 30, 2024 /PRNewswire/ -- Self-preferencing (when a platform favors its own products or services over those of third parties) by large tech companies is scrutinized as anticompetitive in legislation proposed in Congress to restrict the practice. However, passage of the bills could unintentionally raise consumer prices by reducing competition between sellers, according to research co-authored by Associate Professor of Marketing Bobby Zhou at the University of Maryland's Robert H. Smith School of Business.

The American Innovation and Choice Online Act (AICOA) restricts the nation's largest tech companies from not only engaging in self-preferencing but also other acts, like limiting the number of products competing companies can put on large digital platforms. The Open App Markets Act keeps app marketplaces from engaging in self-preferencing and prohibits marketplaces with over 50 million users from forcing developers to use an in-app payment system owned or controlled by the app store.

"Regulatory agencies in the U.S. are worried that the fate of millions of consumers is being determined by a few big firms," says Zhou. Under AICOA when a shopper searches for a product, a large online retail platform would have to first display "whatever product aligns with that consumer's personal preferences with the one with the best fit coming up first," says Zhou. So, if you always buy Stanley water bottles, when you search for water bottles, Stanley drinking cups would be displayed first instead of one of the platform's own brands.

Research by Zhou in separate papers — "Antitrust Regulation" with Daniel Sokol at the University of Southern California and "Self-preferencing and Search Neutrality in Online Retail Platforms" with Tianxin Zou at the University of Florida — finds this kind of regulation may lead to higher prices.

If self-preferencing by the largest digital markets goes away, the seller whose product appears first during a search may decide to raise prices because it has enough well-matched customers to extract that profit or surplus. The seller whose product appears second might also charge more for the same reason. "This is a situation where both sellers have very strong incentives to keep their prices high, so they don't really compete head-to-head," Zhou says. "To some extent, this ex-ante (preventative) regulation backfires."

The European Union has already enacted regulations that ban big tech companies from making sure their products are displayed before those of other firms. The rules have been highly criticized and the European Commission recently opened an investigation into whether Apple, Alphabet and Meta are complying with the EU's Digital Markets Act. 

In their paper, Zhou and Sokol assert that digital markets have become increasingly important for the economy, as they enable new forms of innovation, competition and value creation in the process of exchanging goods, services and information. And Zhou says, "The Justice Department and the Federal Trade Commission are justified in looking into big tech platforms. I just caution against hasty decisions that are nearly impossible to reverse."

About the University of Maryland's Robert H. Smith School of Business
The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

Contact: Greg Muraski, [email protected]

SOURCE University of Maryland's Robert H. Smith School of Business